1- 48 Pages (Sept Issue)Nimish Parekh Hasmukh Shah A.K. Venkat Subramaniam Prof. R.Vaidyanathan...

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Volume II, No. 10

SEPTEMBER 2004

Editorial Board:C.S.RaoP.A. BalasubramanianS.V. MonyK.N. BhandariA.P. KurianNick TaketAshvin ParekhNimish ParekhHasmukh ShahA.K. Venkat SubramaniamProf. R.Vaidyanathan

Editor:K. Nitya Kalyani

Hindi Correspondent:Sanjeev Kumar Jain

Design concept & Production:Imageads Services Private Limited

Printed by P. Narendra andpublished by C.S.Rao on behalf ofInsurance Regulatory and Development Authority.

Editor: K. Nitya Kalyani

Printed at Pragati Offset Pvt. Ltd.17, Red Hills, Hyderabad 500 004and published fromParisrama Bhavanam, III Floor5-9-58/B, Basheer BaghHyderabad 500 004Phone: 5582 0964, 5578 9768Fax: 91-040-5582 3334e-mail: [email protected]

© 2004 Insurance Regulatory and Development Authority.Please reproduce with due permission.Unless explicitly stated the information and views published inthis Journal may not be construed as those of the InsuranceRegulatory and Development Authority.

C.S.RAO

Insurance is about evaluating risk and devisingappropriate mechanisms to cover that risk. As withany industry, the insurance industry faces risksof its own. Some similar to others and many, quiteunique. Risk management within the insuranceindustry is what we look at in this issue ofIRDA Journal.

Transparency and adherence to sound principlesof governance are key to risk management. TheAuthority is in the process of framing corporategovernance norms for the industry and,simultaneously, is encouraging the differentstakeholders in the industry – like life and non-lifecompanies, brokers, surveyors – to create or activateforums to function as self regulatory organisations.The move from central regulation to self regulationis a reflection of a global trend where good marketconduct is ensured by the players themselvesthrough market discipline and supervision.

Collective efforts at regulation are moreconducive to setting high standards andmaintaining them. There is sound reasoning behindthis. It is that all players in the financial sector areinterlinked not only by transactions but byperception also. A crisis in one company leads to

From the Publisherserious apprehensions among the customers of allcompanies triggering a cascade of knee jerkreactions. Industry members realise that theirstrength depends on the weakest link and thecollective wisdom of the industry members wouldbe to guard against that link being so weak that itwill snap and plunge all of them into crisis.

The next issue will explore an area where theAuthority wishes to see rapid development. Healthinsurance is linked with reforms of the healthcareprovider system. Given that reform in that area isnot in the hands of the insurance system, we wouldlike to see what can be done without waiting formajor reforms in the providers’ domain. The focusof the development has to be health insurance forthat section of the population who can afford to paythe premium but cannot meet the cost of treatment.There are, however, sections of the population whocannot meet even the modest cost of premium.What are the interventions needed to help them?How do we devise an insurance cover that does notresult in pushing the cost of providing healthservices upwards? These are issues of major concernand we look forward to innovative ideas to addressthese concerns.

‘Towards Microinsurance’

Vantage Point - K. Nitya Kalyani 4

In the Air 5

Statistics - Life Insurance 8

Analytical Assessment - John Thorpe 22

Life Risk - Dr. H. Sadhak 25

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IT in Insurance - M. Arunachalam 36

Statistics - Non-Life Insurance 40

Keeping Count 42

News Briefs 44

Round up 48

Are the ProtectorsProtecting Themselves?

Inside

Shriram Mulgund

G. V. Rao

Financial Reporting forLife Insurers

InsideISSUE FOCUS

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19

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elf InterestSHow physicians heal themselves is the topic for this month’s issue of IRDA Journal. Through the eyes of a

cross section we see how the industry that specialises in assessing and monetising risk manages its own

risks. We have writers like Mr. G. V. Rao with whom regular readers are familiar, Mr. John Thorpe of Aon

Insurance and Dr. Sadhak, Executive Director, LIC giving us their inputs on the topic.

The way the Regulator manages risk, perhaps, is by laying down regulations and reporting standards and

monitoring them scrupulously. And the reporting required of the insurance industry is a critical input in

carrying out this task. There is exhaustive input from Mr. Shriram Mulgund, an Indian actuary working in

Canada who details and analyses the financial reporting standards required of Canadian life insurers and

compares them to those for Indian life insurers.

The IRDA has also put out a concept paper on Microinsurance which is a formalisation of the social sector

coverage that the regulator would like to enable and ensure. Being one of the key expectations of the society

out of liberalisation of the insurance market, developing microinsurance and along healthy lines too is

IRDA’s concern and it plans to bring out suitable regulations towards this end. What you will read in this

issue is the draft of that regulation for comment before finalisation.

We resume the Keeping Count column of Mr. P. S. Prabhakar after a break that was forced by special

articles and additional statistics in the recent issues. We also bring you the final part of Mr. M. Arunachalam’s

series on Technology and the Indian insurer, this one focussing exclusively on the status of IT in Indian

insurance companies. His recurrent theme of enterprise wide connectivity and data mining and warehousing

as essential and critical to the insurance business is reiterated.

The next issue is on health insurance and is timed to coincide with a conference on health insurance that

IRDA is holding in October in Hyderabad. We would like to present ways to take health insurance to the huge

and definitely interested population overcoming the disadvantages of a heterogenous healthcare industry

with its price disparities, geographical inequities in availability and price opaqueness.

This is one customer lead product and insurance companies must be thinking of ways to manage the

downside and exploit the market. If you wish to share your ideas with our readers write in to us quickly!

K. Nitya Kalyani

�� Jour Jour Jour Jour Journal, September 2004nal, September 2004nal, September 2004nal, September 2004nal, September 20044

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To Health Insurance!K. Subrahmanyam

Can life insurance companies transacthealth insurance business? This is thequestion that is asked of us in the IRDAin various forums.

The answer to that is Yes. Lifeinsurers registered with IRDA cantransact health insurance business. Notonly as riders and not only benefitpolicies but also standalone, indemnitypolicies. In fact, Tata AIG LifeInsurance Company is alreadytransacting health insurance businessselling standalone health insurancecontracts.

Some life insurers are skeptical thatby law they cannot issue healthinsurance contracts. Some do not havecapacity or the required infrastructureto handle such contracts - particularlywhen it comes to claims settlement. Inthis article, we describe how a lifeinsurer can legally transact healthinsurance business.

Definition of health insurancebusiness

Health insurance business has beendefined in the IRDA’s Regulations onRegistration of Indian InsuranceCompanies, which covers indemnity-type benefits as well as assured benefits.The definition is:

“health insurance business” or “healthcover means the effecting of contractswhich provide sickness benefits ormedical, surgical or hospital expensebenefits, whether in-patient or out patient,on an indemnity, reimbursement, service,prepaid, hospital or other plans basis,including assured benefits and longterm care;

It is obvious from the definition thathealth insurance contracts could beshort term or long term, and could be ofthe reimbursement type or the fixedbenefit amount variety, or both. Thedefinition is highly flexible and broadsince the objective was to serve theneeds of the insuring public.

Who can sell health insurancecontracts?

The Insurance Act, 1938 allows bothlife insurers and general insurers to sellhealth insurance contracts toindividuals or groups, and says that the

Authority should give preference to thoseinsurers who plan to have a focus onhealth insurance at the time of grantingof certificate of registration. Section 3(2AA) of the Insurance Act, 1938 spellsout clearly who can offer health insurancecontracts and to whom, and the meaningof health insurance contracts.

Section 3 deals with the registrationof insurers. Sub-section 2AA isreproduced below:-

2AA) The Authority shall givepreference to register the applicant andgrant him a certificate of registration ifsuch applicant agrees, in the form and

manner as may be specified by theregulations made by the Authority, tocarry on the life insurance business orgeneral insurance business for providinghealth cover to individuals or group ofindividuals.

An applicant who wishes to beregistered as an insurer shall either dolife insurance business or generalinsurance business but not both. Inindustry parlance, no company can be acomposite insurer. However, if theapplicant chooses life insurance business,he can transact health insurance business.If the applicant chooses to become ageneral insurer too, he can transact healthinsurance business!

Why are insurers, particularly lifeinsurers, not actively selling healthinsurance contracts?

Many life insurers are offering healthinsurance riders instead of standaloneproducts, which they probably evaluateas being easier. For standalone healthinsurance contracts, one should have,among other things, expertise in healthproduct design and pricing, definitionsand claim settlement procedures. Lifeinsurers are stopping with selling ridersand assured benefits without thinkingof diversifying their activities.

They need to diversify their activitiesto enter this area too, particularly sinceservices in corporate hospitals arebecoming better and TPAs (Third PartyAdministrators) are in place throughoutIndia. Managed healthcare too ispossible in India.

The author is Executive Director(Actuary) IRDA.

The Insurance Act, 1938allows both life insurersand general insurers tosell health insurance

contracts to individuals orgroups.

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Draft guidelinesDraft guidelinesDraft guidelinesDraft guidelinesDraft guidelinesThese instructions/guidelines are applicable to all the

training institutes including in-house training institutes of the insurers.These guidelines will be effective ---------------, 2004. Any violation,non-adherence and breach of these instructions shall be treated asviolation of provisions of IRDA Act, Insurance Act and regulations madethereunder requiring practical training for the grant of licence to aninsurance agent and renewal thereof and met with penal provisionsincluding fine, suspension, and cancellation of the approval granted bythe Authority from time to time.

1. The applicant shall have to undergo at least 100 hours of practicaltraining in life or general insurance business which may be spreadover three to four weeks, where such applicant is seeking licencefor the first time to act as an insurance agent. The approved traininginstitutes will cover the syllabus already prescribed by the Authorityduring this period. In case of 50 hours of training, the duration willbe half as mentioned above.

2. The training duration should be minimum 18 working days excludingSundays and holidays with six hours per day excluding lunch andtea break applicable for full time batches. For parttime batches thetraining can be imparted three hours daily in the evening excludingtea break and the minimum duration of the training will be 34working days excluding Sundays and holidays.

3. No product training/market survey/revision examination should beincluded into this 100 hours training. The product training, if any, tobe given by the insurance company should be over and above theminimum training hours prescribed by the Authority.

4. The attendance record of the trainees should be maintained at theinstitute for necessary inspection at any given point of time. Thecandidates should sign the attendance register in his/her own hand-writing. It will be the duty of the person in charge of the institute tomark absent, preferably with red-ink. No relaxation in attendanceis permitted. The attendance will be countersigned by the faculty orin charge of the training centre.

5. In case of short-fall of attendance, extra class may be permitted butthe extra hours may be specified separately with proper attendanceand details of faculty.

6. Every Institute should have at least one qualified permanent facultywho is at least an Associate or Fellow from the Insurance Instituteof India for each stream. Those not fulfilling this requirement maybe required to obtain the above qualification within two years.

7. The attendance register of the faculty members should be maintainedat the training institutes. The faculty should sign the attendance register

New Guidelines for Agents’ Training Institutes

in his/her own hand-writing daily. It will be the duty of the person incharge of the institute to mark absent preferably with red-ink.

8. The record of the payment made to faculty should be maintained atthe training institute i.e. batch-wise payment details should bemaintained. In case the employment of the faculty is full time,record of monthly wages/payment should be maintained.

9. The faculty should provide details of the other institutes with whomthey have been empanelled as part-time/guest faculty.

10. The sponsorship letter must be available with the training instituteat the time of commencement of training session and thereafterkept for the record and inspection purposes.

11. Register should be maintained at the training institute giving detailsof batches completed, strength of the each batch, number ofcandidates decertified, name of the sponsored insurer and detailsof faculty who imparted the training with dates. The record of resultsof the examination whether passed/failed recorded in the sameregister giving details of date of examination and centre.

12. The seating capacity of each class-room should not exceed 40.13. The fresh accreditation will be given on need basis after assessing

the needs of the particular city/town.14. The initial approval will be for a period of two years and consideration

of further renewal up to two years would depend on the satisfactorycompliance of requirements of accreditation.

15. The insurance companies would regularly send their officials to theoversee the proper conduct of the training at the institutes andwould not sponsor candidates to those institutes that are notmaintaining the required standards of and facilities for the training.

16. The training institute must display the certificate of accreditation toimpart training issued by the Authority at the training institute.

17. The institute should not allow a franchisee to conduct courses on itsbehalf even if the faculty is that of the institute. The institute shouldconduct the training on its own or hired premises with properinfrastructure.

18. No marketing fee/consultancy fee payment is permitted for gettingthe training batches.

19. Henceforth, no temporary accreditation will be given by the Authority.The existing institutes who have been granted temporary accreditationshall cease to operate within one month from the date of issue ofthese guidelines or the actual date of expiry whichever is earlier.

20. It will be the responsibility of the insurance company to checkthe status of the institute before sponsoring any candidates for

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BROKER SUSPENSION REVOKEDFollowing compliance with the regulations and an undertaking toensure strict compliance in future, IRDA has revoked the suspensionorder on the broking licence of Mass Insurance Brokers Pvt. Ltd. OnJune 8 this year, the broker’s licence was suspended for violatingRegulation 26 of IRDA (Insurance Brokers) Regulations, 2002.

IRDA CAUTIONS BROKING COMPANIESIRDA Member (Non-Life), Mr. Mathew Verghese, has said in a circularto insurance broking companies expressing concernabout information received by the Authority about PrincipalOfficers of licensed insurance broking companies being engaged inother activities.

“Instances have also come to notice where Principal Officer(s) haveleft the services of the broking companies and the same was notbrought to the notice of the Authority immediately but after a lapse

training. If name of the training institute is not displayed on IRDAweb-site, no insurer should sponsor the candidate for training tosuch an institute.

21. In case of mofussil areas or the cities where there are no accreditedinstitutes and an insurance company intends to appoint agents, itwill be the responsibility of the insurance company to conducttraining and comply with the requirements strictly.

22. The institutes must keep with them one set of records of the trainingat the place where the training is being imparted.

23. No accreditation will be given to the institutes that are impartingtraining in the hotels. Fresh accreditation/renewal, if any, will begranted by the Authority only to Institutes who are maintaining goodinfrastructure and complying with all other requirements specifiedin the application form for licence/renewal of the criteria of obtainingmarks which is placed on the web-site of the Authority alreadyprescribed by the Authority in this behalf.

24. The institute should confine its activities only to the place/city forwhich it has been given the approval. No training outside the saidplace/city is permitted. The premises approved for the training shallnot be used for any other purposes and no sharing arrangements inthe said premises shall be permitted for other training or otherinstitutes or organisations.

25. The institutes that have not conducted any training during the lastfinancial year will not be considered for renewal.

26. (i) The existing institutes may convey their willingness toabide by these instructions on a simple form for eachcentre separately. The information may include: Name& Address of the institute, Date of accreditation of theinstitute, Expiry date of validity of the accreditation,Whether accreditation granted for Life/General or both,Name of the person in charge of the institute.(ii) The above information must reach the Authority within30 days from the date of issuance of these guidelines.The consolidated list of approved training institutes willthen be placed and updated from time to time on ourweb-site so that Insurance Companies can approach themfor conduct of training.

27. Prior approval of the Authority must be obtained ifthe training institute intends to change any of the particulars,details or provisions already approved by the Authority.All such changes would be simultaneously incorporated on theIRDA web site.

of considerable time. In some cases, the Principal Officer was deputedto look after other assignments in the group companies while workingas the Principal Officer. It has also come to Authority’s notice that brokingcompanies have appointed personnel from other broking companieswithout the incumbent Principal Officer resigning from his earlier position.In some cases, the broking companies fail to notify the Authority aboutthe change in position of Principal Officer in their respective companieswith the result that old names continue to appear on the IRDA Website,”he said. The circular emphasised that the IRDA (Insurance Brokers)Regulations, 2002 envisage the post of Principal Officer as a full timepost and not on part time basis and with considerable amount ofresponsibility attached to it.

The Principal Officer is responsible for conducting the affairs ofthe broking company in a professional manner and as per the

rules and regulations laid down / prescribed by the Authority.He is the interface between the customers and the insurers. He alsoacts as a link between the Regulator and the broking company andis not permitted to look after any other assignment or position solong as he is the Principal Officer of a broking company, even for atemporary period.

Any change in position of the Principal Officer of a broking companyshould be brought to the notice of the Authority without loss of timeand the position of Principal Officer of an insurance broking companycannot be kept vacant. The broking company should ensure asubstitute, who fulfils all the eligibility requirements i.e. educational,training requirements, not suffering from any of the disqualificationsunder section 42 D of Insurance Act, 1938, etc., in place before itrelieves the current Principal Officer, the circular said.


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BackgroundMicroinsurance products are often bundled with micro-savings and

micro-credit, thereby allocating scarce resources to micro-investmentswith the highest marginal rates of return. Microinsurance is the mostunderdeveloped part of microfinance. Yet various schemes exist thatare viable, benefiting both the institutions and their clients. Suchschemes have generally served two major purposes:(i) they have contributed to loan security; and (ii) they have servedas instruments of resource mobilisation. The greatest challengefor microinsurance lies in the combination of viability and sustainability with outreach.

Although introduction of sound practices such as appropriate policysizes and timely payment of instalments of premium or positiveincentives to renew on time in order to avoid policy lapses canbe feasible, the ultimate effectiveness of interventions focusingon institutional transformation and sound insurance practices willvary considerably, depending on the appropriateness of theregulatory environment.

Development goalTo enable microinsurance to be an integral part of a country’s wider

insurance system, it is important for every insurer to adjust its costs ofserving marginal clients in remote areas, collecting premiums andinstalments, and offering doorstep services.

Today we have a variety of microfinance institutions with nationaland local outreach. Many of them have already become corporateagents or have entered into referral arrangements with insurers.However, semiformal institutions including savings and creditcooperatives, NGOs and self-help groups which have immense potentialin carrying the message of insurance as also solicit insurance businessare yet to be utilized in a manner where their true potential can beharnessed to increase the insurance penetration levels. This is due torestrictions in the existing agency regulations in terms of minimumeligibility norms in order to become an agent.

Depending on the existence and vigour of such institutions, thefollowing alternatives have emerged, for offering strategic entry pointsfor microinsurance development:

i. Adapting formal insurance arrangements to the needs of the micro-economy.

ii. Upgrading non-formal (comprising semiformal and informal)insurance arrangements with insurance companies.

iii. Linking formal and non formal insurance institutions with banksand self-help groups.

iv. Establishing new local institutions providing microinsurance services.

The first three strategies may be inter-connected:i. adapting insurance companies to the requirements of the micro-

economy is a first step; then

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ii. linking them as wholesale institutions to self-help groups as retailers;and finally,

iii. upgrading self-help groups e.g. to the level of financial cooperativesor village banks.

If insurers are to serve customers who differ widely in terms ofservice costs and risks, the only viable inducement for them is anadequate margin, lest they exclude small farmers, - micro-entrepreneurs and people in remote areas. Only sound social insurance,which combines a social mandate with profit-making, has a chance ofsustainability.

Institutional adaptationThe experience so far has been that formal financial institutions

serve but a fraction of the population, which typically lies within theupper quartile of the social hierarchy. Through adaptation to themicrofinance market requirements, they may gradually expand intothe second-highest quartile and into segments of the lower quartiles.Within the foreseeable future they will normally not be able to fullyserve that market.

Non formal finance mostly rests on local institutions whichare directly accessible to all segments of the population. Self-HelpGroups (SHGs) are member-owned and member-controlled localinstitutions. They may either be financial groups, with financialintermediation as their primary purpose; or non financial groups,with financial intermediation as a secondary purpose, such asvendors’ associations, family planning groups and numerous othertypes of voluntary associations.

The functions that need to be focused must include: providingguidance to members, collecting premium installments from members,insurance services to members, communication and exchange ofexperience, providing linkages with banks, NGOs or donors, supportingthe proposals of individual members to insurance companiesthrough recommendations.

Linkage to InsurersOn a modest scale, various forms of life and health insurance

have been successfully practiced by different institutions in differentcountries, particularly as part of loan protection schemes. Micro-insurance procedures and services should be set by insurers rather thanthe regulator. Appropriate procedures and services should be appliedto attain (1) sound financial management, (2) convenient and safesavings premium collection and deposit facilities, (3) appropriate claimappraisal and processing procedures, (4) adequate risk management,(5) timely collection of premium installments, (6) monitoring and(7) effective information gathering, all of which may include cooperationbetween different formal and non-formal intermediaries in fields whereeach is most effective.

Proposed Microinsurance regulationsIn order to introduce the concept micro-insurance it is necessary

to draft suitable bring in suitable regulations to enable insurers to designand distribute and service micro-insurance products and discharge theirobligations to the rural and social sectors as per provisions of theInsurance Act, 1938.

1. It is proposed that an insurer transacting life insurance businessshall be permitted to provide life micro-insurance products as wellas general micro-insurance products provided it ties up with aninsurer transacting general insurance business for the general micro-insurance products, and vice versa.

2. In addition to an insurance agent or corporate agent or insurancebroker who are authorized to solicit and procure insurance business,including micro-insurance business with an insurer in accordancewith the provisions of the Insurance Act, 1938 and the regulationsmade there under it is also proposed to introduce the concepts of“micro-insurance product” and “micro-insurance agent”.

Micro-insurance product3. A “life micro-insurance product” means any term insurance contract

with or without return of premium, any endowment insurance contractor health insurance contract, with or without an accident benefitrider, either on individual or group basis, as per terms stated in theTable A below, filed with the Authority:

NOTE: The present average sum insured is around Rs. 5,000. Thisis highly inadequate to provide any tangible relief even to a individualbelow the poverty line. Therefore, it is suggested that the minimumamount of cover of Rs. 10,000 appears more realistic.

4. A “general micro-insurance product” means any health insurancecontract, any contract covering the belongings such as hut, livestock,any personal accident contract, or tools or instruments, either onindividual or group basis, as per terms stated in the Table B below,filed with the Authority:

Distribution of microinsurance products5. The micro-insurance products may be distributed by individual

insurance agents or corporate insurance agents or insurance brokersor micro-insurance agents.

Micro-insurance agent6. A “micro-insurance agent” shall be a Non Government Organisation

(NGO) or a Self Help Group (SHG).

Explanation: For the purposes of this regulation:(i) a Non Government Organisation (NGO) shall be a registered

non-profit organization under the Society’s Act, 1968 with aproven track record of working with marginalised groups withclearly stated aims and objectives, transparency, andaccountability outlined in its memorandum, rules and regulationsand demonstrates involvement of committed people.

(ii) Self Help Group (SHG) may be an informal group or registeredunder Societies Act, State Co-operative Act or as a partnership


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firm, consisting of 10 to 20 with a proven track record ofworking with marginalised groups with clearly stated aimsand objectives, transparency, and accountability outlined inits memorandum, rules and regulations and demonstratesinvolvement of committed people.

(iii) The minimum number of members comprising a group shouldbe atleast ten for insurance of individuals, and atleast fifty forgroup insurance.

Scope and functions7. A micro-insurance agent shall be appointed by an insurer by a

deed of agreement or memorandum of understanding whichshould clearly specify the terms and conditions, duties andresponsibilities of both the micro-insurance agent and the insurer,and he shall abide by the following:-

a. He shall work either for one life insurer or for one generalinsurer or for one life insurer and one general insurer;

b. He shall be specifically authorized to perform one or moreof the following functions:—

i. Maintaining a register of all members and theirdependants covered under the insurance schemealongwith details of name, age, address, nomineesand thumb impression/ signature;

ii. collection of proposal forms;

iii. collection of self declaration from the member that heis in good health;

iv. collection of monies for issuance of contract or remittanceof premium;

v. distribution of policy documents;

vi. assistance in the settlement of claims;

vii. nomination; and

viii. any policy administration service.

c. The micro-insurance agent or the insurance company shallhave the option to terminate the agreement/MoU aftergiving a notice of three months.

d. All such agreements/ MoU must have the prior approval ofthe Head office of the insurance company.

Remuneration/Commissione. He shall be entitled to receive a fee from the insurer to cover

for all services rendered, and which shall not exceed:

i. Twenty per cent of the premium in case of life insurancecontracts; and

ii. Seven and half per cent of the premium in case ofgeneral insurance contracts.

In case of termination of agreement no future commission/remuneration shall be payable.

Employment of specified persons

f. He may also employ specified persons with the prior approvalof the insurer for the purpose of discharging all or any of theactivities mentioned in (b) above. However, for the purposeof this regulation no corporate agent or individual agentlicenced by the Authority shall be prohibited to employ anyspecified person for the purpose of soliciting and servicing ofmicro-insurance product.

Code of Conductg. The micro-insurance agent and every specified person

employed by him shall abide by the code of conduct asmentioned in IRDA (Licensing of Insurance Agents)Regulations, 2000 and the relevant provisions of IRDA(Insurance Advertisements and Disclosures) Regulations,2000. It shall be the responsibility of the insurance company

to ensure compliance of the code of conduct, advertisementsand disclosure norms.

Sanctions/ Penaltyh. Any violation of the code of conduct shall lead to termination

of the agreement/ MOU with the insurer forthwith and shallattract the penal provisions as normally applicable to aninsurance agent

Duties and responsibilities of the insurerproduct design and development8. Every insurer shall be subject to the “file and use” procedure with

respect to filing of micro-insurance products with the Authority.

9. Every insurer shall issue insurance contracts to the individual micro-insurance policyholders in the local language which is simple andeasily understood by the policyholders.

10. Every insurer shall issue insurance contracts to the groupmicro-insurance policyholder in the form of a schedule showingthe details of individuals covered under the group, and also issuea separate certificate to each individual evidencing proof ofinsurance, containing details of validity period of cover, name ofthe nominee and address of the underwriting office.

Underwriting11. No insurer shall be allowed to authorize any micro-insurance agent

or any other outsider to underwrite any insurance proposal for thepurpose of granting insurance cover.

Capacity building12. It shall be the responsibility of every insurer to impart atleast 25

hours of training at its expense through its designated officer in thelocal vernacular to all micro-insurance agents and their specifiedpersons in the areas of insurance selling, policyholder servicingand claims administration.

Remuneration/commission13. No insurer shall pay or contract to pay any further amounts by way

of fee or remuneration or compensation in any form other thanwhat has been specified;

Overall responsibility14. Every insurer shall ensure that all transactions in connection with

micro-insurance business are in accordance with the provisions ofthe Insurance Act, 1938 as amended from time to time, theInsurance Regulatory and Development Act and the regulationsand rules made there under.

Submission of information15. E v e r yinsurer shall furnishthe information inrespect ofmicro-insurancebusiness asspecified by theAuthority fromtime to time.

Obligations to rural and social sectors16. All micro-insurance policies could be counted for the purposes of

social obligations to be fulfilled by an insurer as per the provisionsof the Insurance Act, 1938 and the regulations made there under.A micro-insurance policy, if issued in a rural area and comes undersocial sector definition, the policy may be counted for both underrural and social obligations separately.

Complaints/Grievances17. It shall be the responsibility of the insurer to handle and dispose

complaints against a “micro-insurance agent”.

Inspection by the Authority18. The Authority may through its designated officers inspect the office

and records of the micro-insurance agent, at any time, if itconsiders necessary.

Table BType of Cover Minimum Maximum Term of Term Minimum Maximum

Amount Amount Cover of Cover Age Ageof Cover of Cover Min. Max. at entry at entry

Hut or livestock or Tools orimplements or otherassets—against all perils Rs. 10,000 Rs. 20,000 1 year 1 year 18 70Health Insurance Contract Rs. 10,000 Rs. 15,000 1 year 1 year 18 60Personal Accident Rs. 10,000 Rs. 50,000 1 year 1 year 18 60

Table AType of Cover Minimum Maximum Term of Term Minimum Maximum

Amount Amount Cover of Cover Age Ageof Cover of Cover Min. Max. at entry at entry

Term Insurance with orwithout return of premium Rs. 10,000 Rs. 50,000 5 years 7 years 18 60Endowment Insurance Rs. 10,000 Rs. 50,000 5 years 7 years 18 60Health Insurance Contract Rs. 10,000 Rs. 15,000 1 year 7 year 18 60Accident Benefit as rider Rs. 10,000 Rs. 50,000 1 year 5 years 18 60


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Report Card:LIFEThe life insurance industry

underwrote new business premium ofRs.1,86,605.46 lakh during the monthof July, 2004, taking the cumulativepremium underwritten during thecurrent year 2004-05 to Rs.5,52,515.95lakh. LIC underwrote premium ofRs.4,57,019.23 lakh i.e., a market shareof 82.72 per cent, followed by ICICIPrudential and Birla SunLife withpremium underwritten (market share)of Rs.31,173.97 lakh (5.64 per cent) andRs.13,591.67 lakh (2.46 per cent)respectively.

While LIC’s market share declinedfrom 90.12 per cent for the period endedJuly, 2003, all new life insurersincreased their market share, over thecorresponding previous year numbers.

Cumulatively, the new playersunderwrote first year premium ofRs.95,496.72 lakh. In terms of policiesunderwritten, the market share of the

new players and LIC was 8.30 per centand 91.70 per cent as against 6.09per cent and 93.91 per cent respectivelyin the corresponding period in theyear 2003-04.

The premium underwritten by theindustry upto July, 2004, towards

individual single and non-single policiesstood at Rs.81,244.37 lakh andRs.3,39,644.37 lakh respectivelyaccounting for 1,85,806 and 57,95,219policies. The group single and non-single premium accounted forRs.1,21,352.74 lakh and Rs.10,274.47

lakh. The total Individual premium andGroup premium underwritten wasRs.4,20,888.74 lakhs and Rs.1,31,627.21lakhs respectively as against Rs.2,66,468.62 lakhs and Rs.62,636.22lakhs underwritten in the correspondingperiod of the previous year. The numberof lives covered by the industry under thevarious group schemes was 17,95,705during the period ended July, 2004. LICcovered 11,89,843 lives under the groupschemes accounting for 66.26 per cent ofthe market, followed by SBI Life with1,70,035 lives (9.47 per cent), Tata-AIGwith 1,13,730 lives (6.33 per cent) andMetLife with 78,883 lives (4.39 per cent).

The accompanying table does notinclude the numbers for VarishthaPension Bima Yojana. Premiumunderwritten by LIC under this pensionscheme during the period April - July,2004 was Rs.1,07,264.83 lakh towards54,740 policies.

Life new business grows 68 %

The life insurance industryunderwrote new business

premium of Rs.1,86,605.46lakh during the month of

July, 2004.

(Rs. in lakhs)

Sl No. Company Premium u/w % No. of Policies % of No. of No. of lives covered under % of lives of Premium / Schemes Policies Group Schemes covered

under GroupSchemes

July Upto July Upto July July Upto July Upto July July Upto July Upto July1 Bajaj AllianzBajaj AllianzBajaj AllianzBajaj AllianzBajaj Allianz 4,094.124,094.124,094.124,094.124,094.12 1,0675.201,0675.201,0675.201,0675.201,0675.20 1.931.931.931.931.93 20,63420,63420,63420,63420,634 53,42753,42753,42753,42753,427 0.890.890.890.890.89 27,75427,75427,75427,75427,754 49,06649,06649,06649,06649,066 2.732.732.732.732.73

Individual Single Premium 1,522.80 3,559.45 1,697 4,247Individual Non-Single Premium 2,560.99 7,020.22 18,933 49,155Group Single PremiumGroup Non-Single Premium 10.33 95.52 4 25 27,754 49,066

2 ING VysyaING VysyaING VysyaING VysyaING Vysya 762.05762.05762.05762.05762.05 1,921.481,921.481,921.481,921.481,921.48 0.350.350.350.350.35 8,9138,9138,9138,9138,913 26,80326,80326,80326,80326,803 0.450.450.450.450.45 339339339339339 5,8985,8985,8985,8985,898 0.330.330.330.330.33Individual Single Premium 0.19 32.44 27 4,771Individual Non-Single Premium 708.33 1,778.20 8,885 22,026Group Single Premium 53.01 95.26 1 123 255Group Non-Single Premium 0.51 15.57 1 5 216 5,643

3 AMP SanmarAMP SanmarAMP SanmarAMP SanmarAMP Sanmar 372.04372.04372.04372.04372.04 1,302.031,302.031,302.031,302.031,302.03 0.240.240.240.240.24 2,6962,6962,6962,6962,696 9,6169,6169,6169,6169,616 0.160.160.160.160.16 2,5972,5972,5972,5972,597 17,95617,95617,95617,95617,956 1.001.001.001.001.00Individual Single Premium 145.00 529.92 345 1,153Individual Non-Single Premium 173.86 673.57 2,338 8,438Group Single Premium 18.35 20.85 1 1 190 190Group Non-Single Premium 34.83 77.69 12 24 2,407 17,766

4 SBI LifeSBI LifeSBI LifeSBI LifeSBI Life 3,357.413,357.413,357.413,357.413,357.41 8,460.428,460.428,460.428,460.428,460.42 1.531.531.531.531.53 9,2969,2969,2969,2969,296 26,51526,51526,51526,51526,515 0.440.440.440.440.44 73,73773,73773,73773,73773,737 1,70,0351,70,0351,70,0351,70,0351,70,035 9.479.479.479.479.47Individual Single Premium 705.89 1,986.43 418 1,144Individual Non-Single Premium 508.85 1,573.69 8,468 24,759Group Single Premium 1,046.04 3,257.56 1 2 13,381 40,165Group Non-Single Premium 1,096.63 1,642.74 409 610 60,356 1,29,870

��

9�� Jour Jour Jour Jour Journal, December 2002nal, December 2002nal, December 2002nal, December 2002nal, December 2002 9�� Jour Jour Jour Jour Journal, September 2004nal, September 2004nal, September 2004nal, September 2004nal, September 2004

��

(Rs. in lakhs)

Sl No. Company Premium u/w % No. of Policies % of No. of No. of lives covered under % of lives of Premium / Schemes Policies Group Schemes covered

under GroupSchemes

July Upto July Upto July July Upto July Upto July July Upto July Upto July

5 Tata AIGTata AIGTata AIGTata AIGTata AIG 2,556.482,556.482,556.482,556.482,556.48 7,551.747,551.747,551.747,551.747,551.74 1.371.371.371.371.37 17,83017,83017,83017,83017,830 64,42064,42064,42064,42064,420 1.081.081.081.081.08 31,88031,88031,88031,88031,880 1,13,7301,13,7301,13,7301,13,7301,13,730 6.336.336.336.336.33Individual Single PremiumIndividual Non-Single Premium 1,688.16 5,704.18 17,797 64,344Group Single Premium 47.47 198.62 6,602 29,094Group Non-Single Premium 820.85 1,648.94 33 76 25,278 84,636

6 HDFC StandardHDFC StandardHDFC StandardHDFC StandardHDFC Standard 2,347.732,347.732,347.732,347.732,347.73 7,658.627,658.627,658.627,658.627,658.62 1.391.391.391.391.39 17,00317,00317,00317,00317,003 43,75543,75543,75543,75543,755 0.730.730.730.730.73 17,72317,72317,72317,72317,723 52,04552,04552,04552,04552,045 2.902.902.902.902.90Individual Single Premium 642.44 2,104.99 1,655 4,632Individual Non-Single Premium 1,566.72 5,147.12 15,336 39,066Group Single Premium 79.45 245.57 11 53 17,243 44,216Group Non-Single Premium 59.12 160.94 1 4 480 7,829

7 ICICI PrudentialICICI PrudentialICICI PrudentialICICI PrudentialICICI Prudential 8,993.418,993.418,993.418,993.418,993.41 31,173.9731,173.9731,173.9731,173.9731,173.97 5.645.645.645.645.64 43,44743,44743,44743,44743,447 1,42,8141,42,8141,42,8141,42,8141,42,814 2.392.392.392.392.39 705705705705705 6,6906,6906,6906,6906,690 0.370.370.370.370.37Individual Single Premium 1,514.21 5,863.79 1,011 3,565Individual Non-Single Premium 7,171.05 21,985.78 42,429 1,39,204Group Single Premium 4.58 11.59 2 5 192 850Group Non-Single Premium 303.57 3,312.81 5 40 513 5,840

8 Birla SunlifeBirla SunlifeBirla SunlifeBirla SunlifeBirla Sunlife 4,229.524,229.524,229.524,229.524,229.52 13,591.6713,591.6713,591.6713,591.6713,591.67 2.462.462.462.462.46 12,73912,73912,73912,73912,739 36,41136,41136,41136,41136,411 0.610.610.610.610.61 7,0397,0397,0397,0397,039 14,25614,25614,25614,25614,256 0.790.790.790.790.79Individual Single Premium 136.49 430.59 2,450 6,450Individual Non-Single Premium 3,770.42 10,616.21 10,280 29,936Group Single Premium 38.76 138.18 314 1,121Group Non-Single Premium 283.85 2,406.70 9 25 6,725 13,135

9 AAAAA vivavivavivavivaviva 1,283.151,283.151,283.151,283.151,283.15 4,542.674,542.674,542.674,542.674,542.67 0.820.820.820.820.82 6,3546,3546,3546,3546,354 23,81623,81623,81623,81623,816 0.400.400.400.400.40 10,61810,61810,61810,61810,618 39,07639,07639,07639,07639,076 2.182.182.182.182.18Individual Single Premium 15.66 147.90 37 142Individual Non-Single Premium 1,236.29 4,308.27 6,316 23,662Group Single Premium 1.92 4.39 1 14 43Group Non-Single Premium 29.28 82.11 1 11 10,604 39,033

10 Kotak Mahindra Old MutualKotak Mahindra Old MutualKotak Mahindra Old MutualKotak Mahindra Old MutualKotak Mahindra Old Mutual 829.02829.02829.02829.02829.02 2,547.542,547.542,547.542,547.542,547.54 0.460.460.460.460.46 3,9413,9413,9413,9413,941 11,70411,70411,70411,70411,704 0.200.200.200.200.20 779779779779779 27,19727,19727,19727,19727,197 1.511.511.511.511.51Individual Single Premium 270.33 560.59 169 357Individual Non-Single Premium 556.31 1,522.11 3,770 11,340Group Single PremiumGroup Non-Single Premium 2.38 464.83 2 7 779 27,197

11 Max New YorkMax New YorkMax New YorkMax New YorkMax New York 1,863.721,863.721,863.721,863.721,863.72 4,896.904,896.904,896.904,896.904,896.90 0.890.890.890.890.89 19,23919,23919,23919,23919,239 50,12650,12650,12650,12650,126 0.840.840.840.840.84 3,8433,8433,8433,8433,843 31,03031,03031,03031,03031,030 1.731.731.731.731.73Individual Single Premium 25.67 91.57 42 84Individual Non-Single Premium 1,825.71 4,752.18 19,188 50,015Group Single PremiumGroup Non-Single Premium 12.34 53.15 9 27 3,843 31,030

12 MetLifeMetLifeMetLifeMetLifeMetLife 370.07370.07370.07370.07370.07 1,174.481,174.481,174.481,174.481,174.48 0.210.210.210.210.21 2,6212,6212,6212,6212,621 7,3257,3257,3257,3257,325 0.120.120.120.120.12 11,87411,87411,87411,87411,874 78,88378,88378,88378,88378,883 4.394.394.394.394.39Individual Single Premium 17.76 38.71 33 91Individual Non-Single Premium 267.45 822.30 2,580 7,204Group Single PremiumGroup Non-Single Premium 84.86 313.47 8 30 11,874 78,883

13 LICLICLICLICLIC 1,55,546.731,55,546.731,55,546.731,55,546.731,55,546.73 4,57,019.234,57,019.234,57,019.234,57,019.234,57,019.23 82.7282.7282.7282.7282.72 18,57,03618,57,03618,57,03618,57,03618,57,036 54,88,95554,88,95554,88,95554,88,95554,88,955 91.7091.7091.7091.7091.70 4,04,0974,04,0974,04,0974,04,0974,04,097 11,89,84311,89,84311,89,84311,89,84311,89,843 66.2666.2666.2666.2666.26Individual Single Premium 36,288.57 65,897.98 90,537 1,59,170Individual Non-Single Premium 90,836.93 2,73,740.53 17,65,413 53,26,070Group Single Premium 28,421.23 1,17,380.72 1,086 3,715 4,04,097 11,89,843Group Non-Single PremiumTotalTotalTotalTotalTotal 1,86,605.461,86,605.461,86,605.461,86,605.461,86,605.46 5,52,515.955,52,515.955,52,515.955,52,515.955,52,515.95 100.00100.00100.00100.00100.00 20,21,74920,21,74920,21,74920,21,74920,21,749 59,85,68759,85,68759,85,68759,85,68759,85,687 100.00100.00100.00100.00100.00 5,92,9855,92,9855,92,9855,92,9855,92,985 17,95,70517,95,70517,95,70517,95,70517,95,705 100.00100.00100.00100.00100.00

Note: LIC’s business numbers exclude Varishtha Pension Bima Yojana.


We all experience situations thatare just coincidences. This articlegot written out of one suchcoincidence. One of the membersof the Actuarial Society of India (ASI)sent me an e-mail asking mequestions about the manner inwhich the financial reporting for lifeinsurers takes place in Canada.While compiling the information toanswer the questions, I realised thatthe note could become an article thatcould be sent for publication. So,here it is.

This article gives a very broaddescription of the basis of financialreporting for life insurancecompanies in Canada in respect ofthe following:

� Valuation of assets� Valuation of liabilities� Solvency margins

The description is short in mostplaces. If anyone needs to knowfurther details, I will be happy toelaborate.

The Indian practice for valuationof liabilities has a lot of similaritieswith the Canadian practice.Valuation of assets is very muchguided by the accounting practicesfollowed by the accountingprofession in the country. While itis not suggested that the Canadianpractice may be appropriate forduplication in India, knowing thepractices followed in other parts ofthe world may have some benefits –particularly in the area of solvencymargins, where some changes maybe forthcoming if a move to RiskBased Capital approach is to bemade. In Section D, I havecompared the Canadian practicewith the Indian practice and inSection E I have put forth mythoughts on where changes to theIndian practice may be considered.

A. Valuation of Assets1. General approach

The approach used for valuationof assets depends on the asset class

Shriram Mulgund– bonds, mortgages, equities and realestate. The basic objectives in themethods adopted are three-fold:

� To effect a smooth progression ofvalues from the purchase priceto the maturity value for fixedincome assets.

� To take into account the effectof changing market values forequities and real estate in asmoothed manner, thus avoidingwide fluctuations from one yearto the next, and permittingthe benefit of market valuegrowth to policyholders andshareholders through additionalinvestment income.

� To make the effect of the decisionto hold or sell an investmentrevenue-neutral, so that the

profits of the year are not undulyaffected by such decisions.

The following paragraphsdescribe how different asset classesare dealt with.

2. BondsBonds are valued at amortised

cost. Thus, if a bond maturing for100 is bought at 85, the discount of15 is amortised over the term of thebond. As the value of the bond iswritten up, the amount of write-upis brought into investment incomefor that year. Such write upaugments the dividend income paidby the bond. Similar treatment isgiven to bonds that are bought abovepar. Regardless of the market value,the bond is valued at amortised cost.

If the bond is sold prematurely,the amount of realised capital gains

or losses (equal to sale price less theamortised cost) is amortised over theremaining term of the bond in astraight-line manner. Thus, if a bondwith a remaining term of 10 yearsand an amortised cost of 90 is soldfor 110, the realised capital gain of20 is amortised over the 10-yearperiod in equal amounts.

The purpose behind the abovetreatment of capital gains is to makethe sale transaction revenue-neutral. Thus, whether the bond isheld or sold for profit (or loss), theamount of investment incomereflected in the financial statementswill not be meaningfully different –minor differences may arise sincethe two streams of amortisationamounts (before and after sale) willbe slightly different.

If any bond becomes impaired, itsvalue will be written down with theamount of write-down being reflectedas a charge for the year’s profits.

3. MortgagesMortgages are valued at the

amounts of outstanding loans. Thesewill generally be held to maturity. If amortgage is sold prematurely, theamount of capital gain or loss (equal tothe sale price minus the amount ofoutstanding loan) is amortised over theremaining term of the mortgage in astraight-line manner (similar to bonds).

The treatment for impairedmortgages is similar to that for bonds.

4. EquitiesIn the first valuation after a stock

is put on the books, 7.5 per cent ofthe unrealised capital gain (or loss)is brought into investment incomefor the year and the value of thestock is increased (decreased) by thecorresponding amount. In thefollowing years, any unrealisedcapital gain (or loss) is determinedwith reference to the amortised costof the stock and the process ofamortisation is continued.

Financial Reporting for Life Insurers��

— Canada & India: A Comparison

Knowing the practicesfollowed in other parts ofthe world may have somebenefits – particularly in

the area of solvencymargins.

�� Jour Jour Jour Jour Journal, September 2004nal, September 2004nal, September 2004nal, September 2004nal, September 2004 11

If a stock is sold, the full amountof realised capital gain or loss(determined with reference to theamortised cost) is not considered asinvestment income for that year. Inorder to smooth the effect of the saletransaction, each year 7.5 per centof the outstanding amount ofrealised capital gain or loss isbrought into investment income andthe outstanding amount of realisedcapital gains is reduced by thecorresponding amount.

The above treatment has anumber of characteristics. Firstly,the value placed on the investmentis continually updated to reflect themovement of market values.Secondly, the use of amortisation at7.5 per cent avoids the widefluctuation of asset values from oneyear to the next. Thirdly, thetreatment of realised capital gainsensures that whether the stock isheld or sold, the investment incomesfor that year and the succeedingyears are not affected to the extentof the unrealised capital gain at thetime of sale.

5. Real EstateThe treatment for real estate is

identical with that for equities withone difference – the amortisationrate is 10 per cent instead of 7.5 percent. There is a requirement thatall real estate holdings have to beindependently appraised at leastonce in three years. The insurerswill generally value all major holdinginternally each year.

6. Other investmentsStandard accounting practices are

followed for other assets (e.g. cash,short term securities, prepaidexpenses, office equipment, etc.).

7. Manner of reflecting RealisedCapital GainsAs indicated above, the realised

capital gains are amortised over thefuture years. The total amount ofunrealised capital gains is shown on

the balance sheet as a liability – thusthe net value of assets will be equalto value of investments held minusthe amount of the liabilityrepresented by the total amount ofunamortised capital gains. As eachyear passes, the total amount ofunamortised capital gains isdecreased (using the different basesdescribed above) and the value ofinvestments held is written up. Anyunamortised realised capital lossesare given a similar treatment.

B. Valuation of Liabilities8. General description of thevaluation method

The valuation method is calledCanadian Asset Liability Method

(CALM). The principal featuresof this method can be describedas follows:

� The valuation method is appliedto groups of policies where theinsurer is expected to apply aspecific asset-liabilitymanagement practice (e.g. singlepremium annuities in payment,universal life, non-participatinglife insurance, etc.). This methodenvisages an identifiable basketof assets that is associated withthat block of business.

� The method involves scenariotesting – i.e. use of a variety ofinterest rate scenarios withcompatible assumptions for other

parameters. Each scenario isexpected to give a differentreserve level. The actuary thenuses the results of the scenariothat makes sufficient (withoutbeing excessive) provision foradverse deviations.

� For each interest rate scenario,the asset and liability cash flowsare generated for all future years(until the last liability paymentis made). The fund is rolledforward, with the positive netcash flow being re-invested underthe then investment conditions(implied by the interest ratescenario) and the insurer’sinvestment strategy for that blockof business. Any negative netcash flows are met through saleof assets or through a loan basedon the disinvestment strategy.The amount of surplus in the fundis determined when the lastliability payment has been made.Depending on the ultimate levelof the surplus, the initial basketof assets is increased ordecreased and the next iterationis started. This iterative processis continued until such time thatthe ultimate surplus in the fundbecomes zero. After the finaliteration, the statement value ofthe modified basket of assetssupporting that block of businessbecomes the reserve level.

� As indicated above, each scenariowill give a different reserve level.The highest level (from amongstthose providing plausibleadversity) becomes the finalreserve level used in the financialstatements.

9. Steps involved in theapplication of CALMThe following steps are involved

in the application of CALM.

(a) Interest rate scenariosThe interest rate scenarios entail

future yield curves, spreads fordifferent risk classes of bonds and

��

In adopting the RBCapproach, it has to be borne

in mind that the level ofsolvency margin cannot be

considered in isolation – it isthe total of the reserve and

the required solvencymargin that has to be taken

into account.


for mortgages, yields from equities andreal estate, market value growth ratesfor equities and real estate, inflationrates, asset default rates, etc.

(b) Asset cash flowsIn computing the cash flows in

respect of the assets on hand, theeffect of asset defaults, pre-paymentor call options and investmentexpenses will be taken into account.The growth in the market value ofequities and real estate will also betaken into account. The values ofsome of the parameters may dependon the interest rate scenario (e.g. theasset defaults may increase undersome scenarios, the level of exerciseof call options or pre-paymentoptions may depend on the scenario).

(c) Liability cash flowsThe liability cash flows will be

established in respect of the businessin force at the valuation date. Incomputing these cash flows, allrelevant parameters (depending onthe type of business) have to be takeninto account in an explicit manner.The manner in which the levels ofthese parameters will be establishedis discussed in Section 10 below.

(d) Application of CALM inpractice

The method described above canbe applied for uniform blocks ofbusiness. If such a valuation isperformed on the actual business inforce at the year-end, no furthercalculations are needed. Thismethod does not need anycalculation of reserves at thepolicy level. In practice, somevariations are found necessary forthe following reasons:� The scenario testing involves

complex calculations. It entailsuse of scenarios and changingassumptions, possible use ofstochastic techniques (requiringthe use of models), etc. Thetiming at the year-end may besuch that such calculations

cannot be performed at thattime. To overcome this difficulty,the reserve level for that blockis determined ahead of time(using the business in force atthat time). Once the reservelevel has been established, therate of interest at which thepresent value of the liability cashflow is equal to the reserve leveljust established is determined.This then becomes the valuationrate of interest. This interestrate is then applied to the actualbusiness in force at the end of theyear for that block of business –subject to any modifications forany material changes incircumstances that may havetaken place between the date oftesting and the year-end.

� For many purposes, the reservesat the policy level are required –e.g. for determining negativereserves or cash valuedeficiencies, for computing thesolvency requirements, etc.When the above approach todetermine the valuation rateof interest is used, reserves atthe policy level can be computedfor the business valued atthe year end.

10. Liability valuation basesAs described above, CALM

entails the computation of liabilitycash flows. In computing these cashflows, a number of parameters haveto be taken into account. Thesedepend on the product type.Generally speaking, these willconsist of mortality, surrenderslapses, conversion from termto permanent plans, premiumpersistency, policy expenses(with an allowance for inflation),incidence of disability, terminationof disability, etc. In choosingthe assumptions for each ofthese parameters, followingconsiderations have to be takeninto account:

� Each assumption should consistof two components – BestEstimate assumption and aMargin for Adverse Deviation(MfAD).

� The Best Estimate assumptionshould be appropriate for theproduct to be valued and shouldbe based, where possible, on theinsurer’s own experience. If suchexperience is not available, it canbe based on the industryexperience.

� The MfAD is added to allow forthe possibility that the BestEstimate assumption may nothave been determinedaccurately. The level of MfADwill depend on the degree ofconfidence in the Best Estimateassumption – lower theconfidence, greater the MfAD andvice versa.

� It should be noted that the levelof some of the parameters maydepend on the interest ratescenario, e.g. the surrenders/lapses, expense inflation, etc.

11. Special featuresThere are some special features

that would be of interest:

� The reserve under a policy canbe negative or less than theguaranteed cash value. Suchdeficiencies are taken intoaccount at the time of computingthe solvency margins.

� For contracts with very littledeath benefits, such assegregated fund (mutual fund)contracts, the “term of contract”is defined in such a manner thatthe absolute value of any negativereserve does not exceed theunamortised acquisition costs.

12.Professional guidance toactuariesThe Canadian Institute of

��


Actuaries (CIA) has provided verydetailed professional guidance to themembers in respect of theapplication of CALM – steps inworking CALM, choice of interestrate scenarios, determinationof Best Estimate assumptions,level of MfAD’s for differentassumptions, etc.

C. Solvency Margins13. General approach to

Solvency MarginsThe Office of the Superintendent

of Financial Institutions (OSFI), theCanadian insurance regulator, haspublished a very detailed guidelinefor the computation of the solvencymargins. The solvency margins,known as Minimum ContinuingCapital and Surplus Requirements(MCCSR), are based on Risk BasedCapital approach. A minimum levelof $5 million is specified. TheMCCSR level is compared with theAvailable Capital to determine theMCCSR Ratio (Available Capitaldivided by the MCCSR).

In the following description, anumber of finer points have beenglossed over.

Components of the MCCSRThe MCCSR consists of the

following five risk components:� Asset defaults (C-1) risk – losses

caused by defaults in payments.� Mortality, morbidity and Lapse

risk – the risk that theassumptions may be wrong.

� Interest margin pricing risk - therisk of interest margin losseswith respect to invested assetsand pricing decisions (other thanthe losses from asset defaults andchanges in interest rateenvironment).

� Changes in interest rateenvironment (C-3) risk – the riskof loss resulting from changes ininterest rate environment.

� Segregated fund risk – the riskof loss from guaranteesembedded in segregated fundcontracts.

Available CapitalThe Available Capital consists of

two tiers – Tier 1 (Core capital)constitutes the highest qualitycapital and Tier 2 (Supplementarycapital) constitutes capital not ofhighest quality but contributing tothe overall strength of the insureras a going concern. Certainrestrictions apply to the levels ofcapital under these tiers.

MCCSR RatioA minimum ratio of 120 per cent

is specified. The reason for a ratio

in excess of 100 per cent is that theMCCSR calculation process does notexplicitly address many risks, suchas risks relating to systems, data,strategic direction, management,fraud, legal and other business risksor any risks not explicitly addressedby the actuary when determiningthe policy liabilities.

The insurers are advised toretain a minimum ratio of 150 percent to provide a cushion above theminimum to cope with the volatilityin the marketplace and economicconditions, innovations in theindustry, consolidation trends andinternational development.

14. Available CapitalAs indicated above, the Available

Capital consists of two tiers.

Tier 1 (Core Capital)This consists of the following

components:

� Common shareholders’ equity –common shares, contributedsurplus and retained earnings.

� Qualifying non-cumulativeperpetual preferred shares.

� Participating account.� 55 per cent of realised capital

gains in respect of surplus assets(equal to 100 per cent of suchgains less taxes).

From this amount a deduction ismade for goodwill, cash surrendervalue deficiency (viz. reserves lessthan cash values) computed on anaggregate basis and negativereserves computed on a policy-by-policy basis. (Note: The cashsurrender value deficiency iscalculated for uniform blocks ofbusiness. Since the calculation isdone on an aggregate basis, anyexcess of reserves over the cashvalues from some policies can offsetdeficiencies under others.)

Tier 2 (Supplementary Capital)This is in turn split into three

components 2A, 2B and 2C. Theseinclude the following:

� Hybrid (debt/equity) capitalinstruments – cumulativeperpetual preferred shares, 99-year debentures, etc.

� Limited life instruments –subordinated term debt and termpreferred shares.

� 75 per cent of the cash surrendervalue deficiency computed onaggregate basis.

� 75 per cent of negative reservescomputed on a policy-by-policy basis.

� Unrealised unamortised capitalgains in respect of surplus assetsless a provision for taxes.

� 50 per cent of terminal dividendreserves in respect of out-of-Canada policies.

��

Adoption of practicesfollowed by anotherjurisdiction without

modification is at timesdifficult or impractical.


Deductions and limitationsFrom the total of T-1 and T-2

capitals, a deduction is made forpolicy liability ceded to unregisteredreinsurers. A number of limitationsare applied, e.g.

� T-2 capital should not exceed T-1capital.

� Negative reserves included in T-2should not exceed 33 per cent of T-1.

15 Asset default risk (C-1 Risk)In quantifying this risk, off-

balance-sheet assets are alsoconsidered. The default factorsdepend on the type and quality ofasset. For assets supportingqualifying participating business, thefactors are reduced by 50 per centto allow for the pass throughfeatures of such policies (a defaultloss can be passed on thepolicyholders through reducedbenefits). The factors given belowrepresent the full factors. Assetsbacking index-linked productsattract separate capital factors basedon correlation calculations.

The MCCSR guideline gives adetailed description of the variousfactors. The following is a broaddescription of the factors used:� Cash, policy loans, receivables

from registered insurers, etc. –0 per cent.

� Outstanding premiums, agents’balances, receivables, prepaidexpenses, receivables from non-approved reinsurers, etc. – eightper cent.

� Short-term securities (under oneyear) – Factors range from 0 percent (for Govt. securities) to twoper cent for commercial paperrated R3, A-3 or equivalent.

� Bonds – Factors range from 0 percent (Govt. securities) to 16 percent (lower than B, C orequivalent).

� Mortgages – Factors range fromtwo per cent (residential first

mortgages) to 8 per cent(mortgages on undeveloped land).

� Equities – For preferred shares,factors range from one per cent(Pfd-1) to 15 per cent (Pfd-5).For common shares and mutualfunds – 15 per cent.

� Real Estate – Factors range fromfour per cent (self-occupiedpremises) to 35 per cent (oil andgas properties).

� For impaired investments, anadditional component of 35 percent less amounts of individualallowances and write-downs.This component should not benegative.

� For restructured loans andmortgages, a factor of 15 per centis used.

� For assets supporting index-linked products, asset defaultfactors are replaced by capitalfactors. These require thecalculation of Correlation Factors(CF) that take into account thereturns credited to policyholderfunds, returns on supportingassets and their standarddeviations. The capital factorsare equal to (100 – CF) per cent.

16 Mortality/morbidity andlapse riskVarious factors are applied to the

measure of exposure that dependson the type of business:

� Life insurance – Net sum at risk(sum assured less reserve).

� Annuities (with life contingency)– Policy liability.

� Disability income (new claims) –Annual premium.

� Disability claims (in course ofpayment) – Policy liability.

The factors depend on the periodof guarantee remaining for thebenefits provided.

(a) MortalityThe factors are per 1,000 of

exposure.

Group life insurance� Participating. Guarantee less

than one year – 0.5. Others – 1.0.

� Non-participating. Guaranteesless than one year, one to fiveyears and over five years – 0.5,1.0 and 2.0 respectively.

Individual life insurance� Participating – 1.0.

� Non-participating. UniversalLife – 1.0. Others - Guaranteesless than one year, one to fiveyears and over five years – 0.5,1.0 and 2.0 respectively.

Accidental death anddismemberment� Multiply above factors by 30 per

cent to reflect the proportion ofaccidental deaths.The component is reduced for

reinsurance ceded to approvedreinsurers. For qualified stop lossarrangements, the ceding companycan reduce the component by anamount not exceeding 40 per centof the amount.

The above amounts are thenadjusted for statistical fluctuation bymultiplying by a factor ranging from1.25 (calculated component up to $1million) to 0.60 (calculatedcomponent over $1 billion).

Annuities involving Lifecontingencies� One per cent of reserves

(including any portion of liabilitythat does not involve lifecontingency).

17 MorbidityNew Claims Risk ( % of Annual

Premium)

� Factors for guarantee periodsless than one year, one to fiveyears and over five years –Individual (12, 20, 30respectively), Group (12, 25, 40respectively).

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� Above factors are multiplied by75 per cent if the benefit perioddoes not exceed two years.

Continuing claims risk� Factors depend on the duration

of disability and length of benefitperiod remaining and range fromtwo per cent to eight per cent ofreserve.

Accident and sickness� New Claims – 12 per cent of

annual premium.� Continuing Claims – 10 per cent

of IBNR relating to prior years.

The calculation is done net ofreinsurance ceded. Adjustmentfactors for statistical fluctuationrange from 1.00 (calculatedcomponent upto $10 million) to0.75 (calculated component over$100 million).

18 Lapses (individual businessonly)

This component is calculated inthe following steps:

� Group the business in Group A(reserves are higher with lowerlapse rates for durations six andover) and Group B (reserves arehigher with higher lapse rates fordurations six and over).

� Recalculate the reserves withlapse rates for Group A beinglower by 10 per cent and forGroup B being higher by onepercentage point. Forparticipating business, 50 per centvalues are used.

� The increase in the reserve is thelapse component of the MCCSR.

19 Interest margin pricing riskThis provides for losses in

interest arising from such events ascommunication problem betweenthe investment and pricingpersonnel, lack of sufficient volumesof new bond and mortgageopportunities and change in theinterest spreads relationshipsbetween different investments.

� For life insurance and A&Sbusiness, the component is 0.5 percent of reserves for participatingand adjustable business and oneper cent of reserve for non-participating business.

� No component is needed forGuaranteed Interest type ofcontracts where the terms at nextrenewals are the same as for newbusiness. For other situations,the factor is 0.5 per cent.

� No component is needed forbusiness where there is no re-pricing risk – e.g. paid upbusiness with no future dividendsor when the policy liabilities arenot discounted for interest – e.g.unearned premiums.

20 Changes in interest rateenvironment (C-3 Risk)

(a) Policy liabilitiesThis covers the risk of asset

depreciation arising from interestrate shifts. The component iscalculated on net of ceded basis. Thereserves are taken net of policyloans if the loan rate is variable andhas no upper limit. The factors arereduced by 50 per cent if the policyhas no guaranteed cash value in thenext five years. No component isrequired for business where thepolicy liabilities are not discountedfor interest or there is no interestcredited.

Non-participating (factors areper cent of reserves)� Life and Health (other than

Universal Life) - Factors dependon the period of premiumguarantee remaining. Factorsfor periods under five years, five

to 10 years and over 10 years are1.0, 2.0 and 3.0 respectively.

� Endowment. Factors for theabove remaining guaranteeperiods are 1.5, 3.0 and 5.0respectively.

� Single premium annuities anddisability claims – 1.0.

Participating and UniversalLife

� Non-participating factors for thelowest guarantee period are used.

Accumulation funds� The factors depend on how the

funds can be withdrawn (with orwithout an adjustment forchanges in interest rates), howthe withdrawn amount can bepaid (single sum, an annuity orin installments) and theremaining period of interestguarantee. The factors rangefrom 0.5 per cent to 10.0 per centof the reserve.

(b) Asset cash flow uncertaintyrisk

This provides for risk arisingfrom prepayment and extensionof debt instruments that aresensitive to interest rates. Thefollowing factors are applied to thevalue of assets:

� Residential and commercialmortgages that have noprepayment penalties orconditions – one per cent.

� U.S. Mortgage Backed Securities(MBS) and Collateral MortgageObligations (CMO) – Factors arebased on “Cash Flow UncertaintyIndex” and range from 0.5 percent to 75 per cent.

� Other fixed income assets – Testingis needed for different interest ratescenarios to determine the CashFlow Uncertainty Index. Thefactors range from 0.5 per cent toeight per cent.

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Change the treatment ofrealised capital gains so

that it becomestransaction-neutral.


� For any assets that aresupporting cash flow testedreserves, the factors are reducedby 50 per cent.

21 Off Balance sheet activity riskThis covers the risk of the

counter party to a transaction, i.e.the credit risk. The face amount ofthe off balance sheet instrumentdoes not always reflect the amountof credit risk. The potentialexposure can be measured by theface amount of the instrumentmultiplied by a “credit conversion”factor. This is then multiplied bythe MCCSR factor.

The credit conversion factorsrange from 100 per cent to 0 per cent(commitments with an originalmaturity of one year or less or thatare unconditionally cancelable at anytime without prior notice). TheMCCSR factors range from 0 per centto 8 per cent. The factors applied toqualified participating business are50 per cent of these factors.

22 Segregated fund guaranteeriskThis covers the risk of the

minimum benefits guaranteedunder segregated fund contracts.This calculation is done through aseries of steps.

Basic factor A1The factors depend on the following:

� Years to maturity.

� Whether or not resets arepermitted.

� Level of minimum death,surrender and maturity benefit.

� Type of fund.

The factors range from 0.01 percent to 27 per cent. Separate factorsare specified for minimum death,maturity/surrender and incomebenefits.

Time DiversificationAdjustment A2

An adjustment is made forcompanies having guaranteematurities that are sufficientlyspread over time. These factorsrange from 1.000 to 0.905.

MV/GV and Time to MaturityAdjustment B

An adjustment is made for therelationship of the current MarketValue to the Guaranteed Value andthe time to maturity. The factorsdepend on the ratio of MV/GV, yearsto maturity and whether or notresets are permitted.

MER Adjustment CThis is an adjustment reflecting

the differences in the actualManagement Expense Ratios fromthose assumed in developing thefactor tables.

Margin Offset AdjustmentThis reflects the reduction to

take into account the margins thatare available in the products.

D. Comparison with Indianpractice

23 General observationsAs indicated at the beginning of

the article, financial reportingpractices in different countries havedeveloped along different historicallines. In looking at the practicesfollowed by other jurisdictions, it isalways informative to appreciate thelogic inherent in those practices.That may be of help in deciding thefuture course of action if a change iscontemplated.

While comparing theinternational practices, thedevelopment on the internationalscene has also to be borne in mind.There is a move to Fair ValueReporting. This may bring inchanges in the manner in which thefinancial reports of life insurers maybe prepared. This includes the use

of Risk Based Capital approach forsolvency margins. The followingsections compare the Canadianpractice with the Indian practice inthe three areas discussed above.

24 Valuation of assetsBonds

The primary feature for bonds isthe amortisation of premiums ordiscounts. In both countries thepremium or discount is brought intoinvestment income each year andthe bond price is written up/down.

There is a major difference in thetreatment of a sale transaction.

� In Canada, the accountingpractice is transaction neutral.Any gain (or loss) is amortised ina straight-line manner over theremaining term of the bond.Thus, apart from any variationin the incidence of theamortisation amounts (beforeand after sale), the sale has noeffect on the financial statements.Such straight-line amortisation isdictated by practicalconsiderations so that all bondswith same remaining terms canbe grouped together (withouthaving to retain the originalterms of the bonds after theyhave been sold).

� In India, any capital gains (orlosses) flow through the financialstatement for the year of sale. Asa result, an insurer sitting on asizable amount of unrealisedcapital gains can sell andrepurchase the bonds and bringin the profits during the year ofsale. Even though transactioncosts have to be incurred, theaccounting practice may dictatethe sale transactions and couldbe misused.

MortgagesEven though the mortgages are

unlikely to be sold prematurely, thecomments for bonds equally apply tomortgages.

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EquitiesThere are major differences

between the Canadian and Indianpractices.� The Canadian practice is based

on market values. In order tosmooth the market valuefluctuations, only 7.5 per cent ofthe excess of the market valueover the carrying value is broughtinto the revenue account eachyear. It is transaction neutral.Thus, any capital gains arisingfrom any sales are amortisedusing the same factor. Also, nodistinction is made between thepolicyholder funds and theshareholder funds.

� The Indian practice is to use costbasis. Thus, any unrealisedcapital gains are offset by acorresponding increase in FairValue Change Account. Aportion of the unrealised capitalgains can be brought intorevenue for bonus declarationssubject to IRDA approval. Itappears that for any equitiessupporting non-participating, thebenefit of any unrealised capitalgains cannot be passed on to thefund (unless it is sold). Therevenue account can beinfluenced by a sale transaction(or a sale and buy backtransaction). Also, the treatmentbetween the policyholder fund andshareholder fund is not the same.

Real EstateThe differences described for

equities equally apply to real estate(in Canada, the amortisation rate forreal estate is 10 per cent instead of7.5 per cent for equities). There areother major differences.

� In Canada, no distinction is madebetween real estate held forinvestment and that is owner-occupied. For owner-occupiedproperties, a rent at the goingmarket rate is imputed. Thishas two effects. Firstly, the yieldon the property is realistic.

Secondly, the use of imputed rentresults into a realisticdetermination of theadministration costs for thebusiness that eventually get builtinto the pricing of products andfor determining the valuationassumption for expenses.

� In India, the treatment of owner-occupied real estate may(will) introduce an element ofunderstatement in the level ofexpenses that will flow into pricingand valuation. Such treatmentof expenses will bedisadvantageous for the newinsurers who may not beholding any owner-occupied

properties and will show higherexpenses resulting from payingrents at the current marketvalues. In all probability,since such real estate will beheld by the shareholderfunds, the shareholder profitswill be understated.

25 Valuations of liabilitiesThe approaches used for

valuation in the two countries arevery similar. Both use an explicitapproach that recognises all futurecash flows, use assumptions for allcontingencies and employ theconcept of “expected” assumptionsand “margins for adversedeviations”. The following could beconsidered as some of the majordifferences:

� The Canadian approach usesasset-liability cash flow testing(along with a multitude ofeconomic scenarios) to the fullextent. The Indian practiceindicates the need for suchtesting in the determination ofthe interest rate assumption butis not ingrained in theprofessional practice.

� The Canadian Institute ofActuaries has provided anextensive amount of guidance tothe profession in matters such asdetermining best estimateassumptions, determiningmargins for adverse deviations,scenario testing, etc. It willappear that the ASI may have toput in more efforts in providingassistance in these matters.

� The most prominent differencelies in the treatment of negativereserves and any reserves lessthan the guaranteed cash values.No minimums are used for suchvalues in Canada. The thinkingbehind this approach is that oncethe Appointed Actuary hasdetermined the valuationassumptions (that includemargins for adverse deviations)there is no need to put anyartificial limitations on thereserve levels. With suchapproach, the financialstatements reflect realisticearnings. Any concerns arisingfrom the solvency considerationsare reflected in the MCCSRcomputations (the asset createdby such reserves is considered tobe belonging to Tier 2).

26 Solvency MarginsRequired Solvency Margins

The Canadian practice uses theRisk Based Capital approach.Significant amounts of effort havegone into identifying the variousrisks and quantifying them.

In India, even though themodified Insurance Act envisages

��

The accounting treatmentgiven to an investmentshould depend on the

nature of investment andnot by where it is held(Policyholders’ Fund or

Shareholders’ Fund)


��

Bring consistency in thetreatment of both sides of

the balance sheet.

the use of a three-factor approach,the Regulations specify only twofactors. The third factor for assetdefaults was (temporarily?) set tozero – primarily due to the opposingviews of some members of theprofession when the discussionswere going on. The present two-factor approach essentially followsthe U.K. practice. Use of an RBCapproach that is appropriate to theIndian environment would havetaken a lot of research. Due to thethen time pressure, it was quitenatural to use an approach followedby some jurisdiction.

In adopting the RBC approach, ithas to be borne in mind that the levelof solvency margin cannot beconsidered in isolation – it is the totalof the reserve and the requiredsolvency margin that has to be takeninto account.

Available CapitalUnder the Canadian approach,

credit is given to all the capital gains(realised and unrealised). In respectof the policyholder funds, such creditis given through the approach usedfor cash flow testing (that recognisesall unrealised capital gains). Inrespect of the shareholder funds, thecredit is given in determining theamount of available capital (with anallowance for any taxes that may bepayable when such gains arerealised).

The Indian approach in respectof any unrealised capital gains ismixed. It will appear that these arepermitted only in respect of realestate held for investment by thepolicyholder funds and not availablefor others (owner-occupied realestate, equities and all Shareholders’Funds). This will undoubtedly causea strain on the insurers in requiringto raise additional capital.

E. Possible changes in theIndian practiceAs indicated at the beginning of

the article, the life insuranceindustries in different countrieswould have developed on differentlines. As a result, adoption ofpractices followed by anotherjurisdiction without modification isat times difficult or impractical.Nevertheless, it is hoped that theabove description of the Canadianpractice and a comparison with theIndian practice may be helpful ifsome changes are contemplated.The worldwide move in the directionof fair value accounting also has tobe taken into account.

Consideration can be given tothe following changes:� Bring consistency in the

treatment of both sides of thebalance sheet. At present, whileon the liability side, the valuationof liabilities attempts to use a fairmarket value approach, theapproach used on the assets sideis still on the book value basis.A change can be considered to usemarket value basis on the assetsside. This can be done by usingmarket values directly or byusing some form of smoothedmarket values as done in Canada.Such change will put the financialstatements on a compatible basis.

� Change the treatment of realisedcapital gains so that it becomestransaction-neutral. Whether aninvestment is held or sold shouldnot affect the financial statement.

� The accounting treatment givento an investment should depend

on the nature of investment andnot by where it is held(Policyholders’ Fund orShareholders’ Fund) or is deemedto be an investment property oran owner-occupied property.

� In valuing the liabilities, anyreserves that are negative or lessthan the guaranteed cash valuesneed not be set to a minimum.Any solvency considerationsshould be reflected in theSolvency Margin levels.

� The Minimum Solvency Marginscan be based on the RBCapproach. This will undoubtedlyrequire a fair degree of researchinto identification andquantification of the applicablerisks. The amount of availablecapital should recognise anyunrealised capital gains on allinvestments that have not beentaken into account in valuing theliabilities – whether suchinvestments are held in thepolicyholder fund or theshareholder fund.Making any of the changes will

involve a number of players – suchas the IRDA, the Actuarial Societyof India and the Institute ofChartered Accountants. Getting aconsensus may not be easy!

The author, an actuary, retired afterspending over 40 years in the lifeinsurance industry. He has been veryactive on the Indian insurance scene.


Risk management by insurers,essentially, is about reducing theirvulnerability due to the changes takingplace within their organisations and inthe environment in which they function.Currently, each department of an insurersuch as the finance, human resource,marketing and technical is left to dealwith its risk exposures independently inits own way and in a piece-meal fashion.There is no corporate-wide view of riskmanagement of these changes as acorporate strategy to build synergiesacross all departments to ensure healthycash flows on a sustainable basis.

Insurers do not as a rule analysetheir risk exposures that have animpact on their bottom line due totheir internal inefficiencies anddeficiencies, the competitive zeal ofothers, the changing customer attitudes,the likely changes in the Governmentand regulatory policies and thepressures from stakeholders, as amatter of best business practice. In thefast changing current market conditions,there is, however, a greater need forinsurers to develop risk managementplans that are approved by their boardsof directors, particularly as there is nostatutory or regulatory compulsion forthe boards to do so.

Enterprise Risk ManagementInsurers perhaps occasionally do put

into practice mechanisms to deal with‘known risks and changes’ that aremostly internal and mostly apparent.These are treated as a part of ‘ChangeManagement.’ But risk factors whoseconsequences are unknown, operatingmostly in the external environment, canmore severely affect insuranceenterprises. Insurers should, therefore,frequently scan the environment forpossible scenarios that might affectthem to be able to put in practicemechanisms that would mitigate theirfinancial consequences of such unknownfactors or risks. ‘Change management’and ‘Risk management’ should both beaccorded a higher priority.

Recently, 14 life insurancecompanies in Nigeria were shut down

Are the Protectors Protecting Themselves?by the Government of Nigeria fortheir failure to meet capital adequacynorms prescribed under the statute.Barings, a British Bank of 233 yearsstanding, was sold to ING for onepound plus losses, following theactivities of one rogue trader, NickLeeson, on account of inadequatesupervision over his functions.Oman National Insurance Co SAOG,in the Sultanate of Oman, that hada market share of 40 per cent collapsedin 2000 due to negligent reinsurancearrangements that escaped corporatescrutiny. These incidents occurred dueeither to unknown and sudden riskfactors; or unacknowledged internalinefficiencies. There was no

management appreciation ofoperational risks and what couldgo wrong with its systems that wouldput the whole enterprise to hugefinancial losses.

Following the collapse of Enron andother corporations in US, the Sarbanes-Oxley Act, 2000 enjoins the boards ofcorporations in US to be responsible fordisclosing to the shareholders that thereare in place processes to managepotential threats to their balancesheets. Financial organisations thatdeal with public funds need stricter riskmanagement corporate controls to dealwith internal and external riskexposures both for survival and growth.

What led to the recent collapse ofinsurance markets abroad?

Anticipating and forecasting theconsequences of the rapid and,occasionally, inevitable changes takingplace within the organisation andoutside of it have not been the topics ofintense discussions at the corporatelevel among the insurers. While insurersare regarded as reasonably good as riskmanagers of their customers’ physicalrisk exposures, they are found to bewoefully wanting when it comes tomanaging their own corporate riskexposures.

A survey carried out recently bythe Financial Services Authority (FSA),UK to determine what caused the failureof several insurers and reinsurers - thatfollowed the recent collapse of theinternational insurance markets in2002 - concluded thatthe major reason was the inabilityor neglect of managements inanticipating the events that occurredand forecasting their consequences onthe cash flows and the margins and nothaving contingency plans to deal withthe unfolding developments.Managements were to blame more thanthe events that occurred.

This article proposes to deal with theidentification of major risk exposuresfaced by insurers either due tooperational business risks or due tochanges in the external environmentthat could cause them severe financialimpact; and why an enterprise riskmanagement strategy plan is necessaryfor their survival and growth. It isbeyond the scope of this article to dealwith the issues of evaluating theirimpact and how best an insurer coulddeal with them. Even in the absence ofsuch an analysis, it is hoped thatinsurers themselves, given the presentstimulus - that is the aim of this article- would consider engaging themselves inexamining the spectrum of their riskmanagement tasks.

G. V. Rao

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— Insurers, risk managers and their corporate activities

A survey by the FinancialServices Authority (FSA),

UK to determine whatcaused the failure of several

insurers and reinsurersconcluded that the majorreason was the inability

of managements to predictevents and forecast their

consequences


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Identification of risk exposures ofinsurers:

The word ‘Risk’ has its origins in theItalian word, risicare, which means, “todare”. Risk-taking is about makingchoices rather than allowing events tounfold on their own. The risk exposuresof an insurer can be itemised as:

(1) Corporate governance risks dealingwith keeping the stakeholders’interests satisfied, and ensuringmanagement accountability forethical and strategic performance

(2) Management of ‘marketing risks’ indealing with multi-distributionchannels for growth

(3) Risks involved in poor customerorientation of staff and their lowmotivational levels resulting in poorbrand image

(4) Fund management risks inimproving investment earnings and

(5) Risks in underwriting and claimsmanagement that have an impact onthe profitability of the insurer.

These risk exposures that are a part ofinternal environment need to be tackledin the context of the external changesthat are imposed on insurers.

The external environment hasthrown up risks such as:(1) Government policy change risks like

the increased FDI, disinvestment ofcapital of public sector companies ormergers among them

(2) Increases in taxes affectingcustomer demand for products

(3) Detariffing of premium structuresleading to market uncertainty

(4) Customer-led risks impacting on thereputation and service standards

(5) Regulatory changes for moreaccountability, transparency anddisclosures by insurers and

(6) Volatility risks in reinsurancemarkets abroad making reinsurancescarce and expensive.

Managing risk exposures ofliberalisation

Though the talk of liberalising theinsurance markets was in the air for anumber of years, the public sectorcompanies are, even now, substantiallyunprepared and unadjusted for thecompetitive changes that have occurredin the market. Equally, the insurerswere found unprepared for the entry ofbrokers and the effect of that on theirmarketing processes though thelegislation to bring them in was debatedfor a few years. The threats that thesechanges could pose to their monopolywere neither identified nor measurednor plans implemented to improve

their attitudes, internal efficienciesand processes to deal with theirconsequences. It has been a familiarstory of reacting to developmentsand fire fighting. The only visibleresponse so far has been theimplementation of a voluntaryretirement scheme for the staff.

Managements of Indian insurerstoday, in the exercise of power andauthority bestowed on them arespending a lot of their time focusing ondealing with the problems of internalenvironment over which they have morecontrol. The changes taking place in theexternal environment over which

they have little control are left, by andlarge, unattended; and when they doloom as large, they are dealt with ascrises to be handled.

Globalisation and Governmentinduced competition have changed theexternal environment faced by insurers.There are now more insurers; moredistribution channels; more regulationand more autonomy for public the publicsector. What new risks have thesechanges thrown up? How have the publicplayers responded to this new situation?Have they even grasped the implicationsof the changes that have come about?

Major changes in the marketsThe major changes that have

recently occurred in the markets are:(1) That the monopoly of public players

and their marketing arm ofDevelopment officers to deal directlywith their captive customers hasbeen irretrievably broken by theintroduction of private sectorcompanies and other distributors

(2) The de-linking the subsidiaries fromthe GIC has weakened them in theareas of co-ordination, investment,reinsurance and HRD practices

(3) The fierce private sector competitionfor profitable segments is anotherchange component

(4) The international reinsurancesituation continues to be volatile

(5) The fluctuating stock market isanother challenge to manage fundseffectively.

These five major changes havesignificantly altered the landscape ofrisk exposures of public players in theirpursuit for customer acquisition forvolumes and profits. They have alsoimposed on the current managementsmore onerous leadershipresponsibilities to lead rather thanmerely to manage.

Need for an enterprise riskmanagement plan

Insurers need, under the presentsituation, to prioritise the above risksand the likely changes they will bringabout and measure how their probable

Managements of Indianinsurers are dealing with the

problems of internalenvironment over which

they have more control. Thechanges taking place in theexternal environment over

which they have littlecontrol are left, by and large,unattended; and when theydo loom as large, they aredealt with as crises to be

handled.


��

The author is retired CMD, TheOriental Insurance Company.

occurrence and the degree of theirseverity would affect their bottom linesfor the future. As will be seen from therange of risk exposures stated above,there are several departments involvedthat deal with them in the process ofhandling them. There is, therefore, anurgent need for a corporate riskmanagement plan to be conceived, drawnup, debated, approved and implementedwith a specified officer responsible forits implementation reporting to theCMD. Banks have taken a lead in thearea of risk management due to theirimplicitly following the internationalcode of rules.

Strategic risk management, unliketraditional risk management, dealswith risks as an inevitable part ofbusiness environment and does notattempt their elimination; but to adaptto them and improve its risk absorptioncapability by understanding theirramifications better and deal with themto earn larger rewards. Risk taking hasrewards attached to it. Many risks thatinsurers assume relate to strategy,systems, culture and internal processesover which they have greater control.Managements have the responsibility tokeep the ‘uncertainty’ inherent in the riskto the minimum. Understanding thisuncertainty, quantifying it, working outthe consequences of it and taking stepsto deal with them or control them is whatrisk management is all about.

While the changes in the externalenvironment and their relative riskexposures can only be anticipated butcannot controlled, it is the responses ofthe internal environment and itsmanagement that will determine howthe external threat changes posed canbe converted into businessopportunities. If the changes and itsrisks exposures are such that threatento weaken the insurers’ organisations,then insurers have to plan internalenvironment transformations to meetthe external change challenges. In eithercase it is necessary for insurers toidentify the risk exposures in theexternal changes and put plans intooperation to take advantage of thechanging scenario.

Managements of insurers have,however, a tendency to deal withimmediate problems rather thanimportant ones. For transformationalthinking to take place, an externalstimulus is needed. It is for the boardsof insurers who are responsible to theshareholder and are enjoined to lay downthe corporate policy to take the lead inthis important area. Should there be aregulation for it?

The serious problems now facedby most public players can be tracedto the absence of a enterprise riskmanagement plan that would notonly enable insurers to understand

better the changing environment andits attendant problems but demandits managements to come up withsuitable response mechanisms todeal with them.

What next?The next urgent issue on the horizon

is the imminent detariffing of the MotorOwn Damage (OD) business from April1, 2005. The OD claims ratios of insurershave significantly fallen in 2003-04resulting in handsome operating profitsfor insurers. Are the insurers now readywith their corporate risk exposureanalysis of how this change, if it shouldcome about, would affect them in termsof competition, growth and profitability

and the possible responses of how bestone should take advantage of the newdevelopment? How will customers react?How will the marketing andadministrative staff deal with thischange? What are their training needsto absorb this change? How will thecompetitors deal with it? Whatstrategies will have to be in place in therun up to the change?

ConclusionThe cultivation of a risk

management attitude towards theircorporate risk exposures, thrown up bythe rapid changes in the external andinternal environment, is fundamentallyimportant. Such an attitude should leadtowards making a careful analysis ofhow best the insurers can trade riskwith opportunity to survive and grow inthe increasingly fierce competitivemarket place.

Where the risks cannot be used asopportunities, but are seen only asthreats, having suitable mechanisms inplace to deal with them can mitigatetheir financial consequences. Thequestion to ask is: are insurers ready tochange their current corporate attitudestowards dealing with risks that threatentheir progress; or alternatively if theycan be converted as opportunities forthem to grow? If they are not, then it isback to the old days of reacting tochanges that might weaken even thecurrent corporate strengths of theinsurers to face the future. It will be justtoo bad if that should happen.

The changes in the externalenvironment and their

relative risk exposures canonly be anticipated butcannot controlled. The

responses of the internalenvironment and its

management that willdetermine how the externalthreat changes posed can be

converted into businessopportunities.


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Reinsurance broking has become lessabout getting the cheapest cover, andmore about managing reinsurancecapital in the most efficient way. A goodreinsurance intermediary thereforemakes significant investment inactuarial and analytical capabilities.The range of services that aninternational intermediary is expectedto provide include detailed lossforecasting, cost allocations, pricinganalysis, cash flow analysis and othertypes of financial modelling. In IndiaAon Re works closely with Aon GlobalInsurance Services to provide high valuerisk management services to Indiandirect insurers and GIC.

Clients normally require valuecreating consultancy services to assistthem in

� Making informed reinsurance buyingdecisions and development in theirmarkets.

� The design, analysis and negotiationof all forms of risk financingprogrammes.

� The quantification of insuranceexposures and the evaluation of riskmanagement strategies.

We have developed (and arecontinuing to evolve) services, modelsand products to meet the increasinglycomplex needs of our demanding clientbase. Currently, our main skills andobjectives include:

� Actuarial and AnalyticalAssessments – assists withprogramme design and subsequentplacing. Especially useful inhard markets for negotiating costjustified rates.

� Catastrophe Exposure Modelling –enables clients to make moreinformed decisions regardingretentions, limits and efficientreinsurance pricing.

� Alternative Risk Financing /Transfer – design, analysis andnegotiation of ‘non-traditional’protections, that combine financingwith insurance and risk transfer.

Analytical AssessmentThis includes access through tocapital markets.

� Dynamic Financial Analysis –utilises sophisticated proprietarymodelling of assets and liabilitiesto evaluate optimal reinsurance/risktransfer structure and the financialstatement impact given the clientsobjectives, such as their appetitefor volatility/stability or any keyratio criteria.

� Captive Feasibility – consultancyservices ranging from the formationof new captives and strategic captiveconsulting, to the analysis andmodelling of the financial impact ofcaptive insurance programmes andthe optimisation of capitalefficiency.

Actuarial and Analytical AssessmentThe assessment and valuation of

risk is an integral part of advising ourclients and broking any risk transfer orrisk-financing product to underwriters,regardless of whether the underwriteris an insurer, reinsurer or capital marketinvestor.

The unit generally takes a stochasticview of the world and has a wide rangeof statistical tools to carry out theanalysis and to develop loss andfinancial models. We compare andcontrast the ‘value’ of the currentreinsurance programme with otheroptions for trading or retaining the risk,based on expected losses and associatedvolatility, with reference to thecompany’s strategic reinsurance buyingobjectives. We have developed our ownproprietary models where appropriate.

We undertake the following maintasks:

� Reinsurance programme modellingand analytical support for property

and liability coverages, includingdetermination of technical pricinghaving regard to loss exposureperiods and market loss probability.

� Risk retention and whole accountreinsurance programme analyses.

� Developing proprietary financialstatement models that add to theactuarial insight we offer and enableus to assess the effectiveness, basedon a company’s objectives andconstraints, of different reinsuranceprogrammes on the company’s profit& loss account and balance sheet.When coupled with investmentmodels we can carry out asset andliability modelling. This is morecommonly called Dynamic FinancialAnalysis (DFA), which allows us todesign the most appropriate andoptimum risk transferringmechanisms for our clients.

� Benchmarking of Reinsuranceprogrammes across the market.Including comparison of pricing,security, retentions and limits.

Catastrophe Modelling, FinancialAnalysis and Solutions

We work closely with clients to modelcatastrophe events against insuredexposures. Through reporting the results

John Thorpe

A good reinsuranceintermediary makes

significant investment inactuarial and analytical

capabilities.

— Through the Eyes of a Reinsurance Broker


��

of such exposure modelling processes asloss exceeding curves (i.e. the wholeprobability distribution of potentiallosses) and superimposing potentialreinsurance structures we are able todemonstrate how exposure and volatilityby layer affect reinsurance marginloading. We aim to provide informationon which management can act. This datacan also provide a meaningful point forevaluating the adequacy of primaryproduct pricing.

Aon Re Services Australia, whichprovides risk management services toall our clients in the Asia Pacific Region,uses the popular RMS, EQE and AIRmodels as well as other specialitycatastrophe models, including AonImpact Forecasting, for naturalcatastrophe modelling of worldwideexposures. We have also developedseveral of our own models for specificregions using advanced softwaretechnology to assess the risk clients facefrom natural and man-made hazardssuch as subsidence, flood, wind andearthquake.

Alternative Risk Transfer and RiskFinancing Solutions and ProductDevelopment

The risk trading market haschanged dramatically in recent years toinclude capacity from insurers,reinsurers, commercial banks, swapmarkets, credit markets andinstitutional investors. ART has cometo mean ‘non-traditional’ products,which combine financing with insuranceand risk transfer, to protect a companyfrom all types of risks, potentiallyincluding those that are not normallycovered by reinsurance. Through ourfinancial engineering capability we focuson creating solutions that use the mostefficient capital sources available. Theefficiency of any risk trading and riskfinancing solution includes themeasurement of its ability to meetclient objectives. Through the modellingand simulation of cash flows we comparedifferent reinsurance or risk financingstrategies to determine the optimalsolution that meets the clientsobjectives, deals with any issues and

impacts the balance sheetappropriately.

This incorporates:

� Actuarial, statistical and accountingexpertise with in depth experienceof financial modelling, financialengineering and premium ratinganalysis.

� Development, design andnegotiation of all forms ofAlternative Risk Transfer (ART)solutions, such as blended covers;multi-year multi-line covers; lossportfolio transfers, whole accountsmoothing protections; finite andfinancial risk reinsurance; doubletrigger and integrated risk products(including weather derivatives);

insurance linked securitisationconcepts (including contingent equityproducts such as CatEPuts®).

� Review of the statutory andgenerally accepted accountingprinciples, the regulatory, tax andlegal objectives and the implicationsof reinsurance or risk financingtransactions.

� Advanced statistical and stochastictechniques to carry our moretraditional actuarial services such ascapital allocation, capital adequacyreviews, commutations for run-offdevelopment and loss portfoliotransfers.

Capital Markets Interface� Aon Global/Aon Re Services work

closely with the Aon CapitalMarkets team in London to identify

suitable opportunities for capitalmarkets solutions which includestaff who are Securities and FuturesAuthorities (SFA), registeredrepresentatives who can provideadvice on products that include theuse of derivatives and other forms offinancial engineering.

Dynamic Financial AnalysisWith new prudential requirements

from regulatory authorities in allcountries, and the increasingly complexmanagement of insurance, the role ofDynamic Financial Analysis (DFA) isbecoming progressively more valuable.

A DFA combines data from theexternal environment (insurance marketconditions, social trends, economicconditions, capital markets) withcompany specific data (businessvolumes by type of business, claimsexperience, asset mix, expense structure,reinsurance arrangements) to representthe insurance company as a singleentity. Modelling takes intoconsideration:

� The random and systemiccomponents of variation inherent ininsurance;

� The particular characteristics of eachline of business;

� Correlation between years andbetween lines;

� The Capital base supporting thebusiness;

� Interactions between assets andliabilities;

� Appropriate mix of various classesof assets (equities, bonds, cash,overseas investments, etc); and

� The suitability of variousreinsurance programmes

Undertaking DFA of a company canprovide insight into its riskprofiles and capital management.

Results can include:� Determination of the key drivers that

affect profitability and variability;

� Determination of profitability fordifferent mixes of lines of business;

The risk trading markethas changed dramaticallyin recent years to includecapacity from insurers,reinsurers, commercialbanks, swap markets,

credit markets andinstitutional investors.


��

The author is Regional Director – Treaty,Aon Reinsurance Brokers Asia.A member of Aon Re Asia’s Boardof Management, he is responsiblefor the strategic direction anddevelopment of Aon’s Reinsurance Treatyportfolio in Asia.

� An estimate of the optimal asset mixto minimise a measure of risk (suchas the probability of solvency) whilstmeeting profit requirements; and

� Determination of an appropriateand efficient reinsuranceprogramme given capital andsolvency requirements.

Captive consultingAon Global/Aon Re Services have

access to internal specialists dedicatedto co-ordinating the delivery of captiveconsulting services. This provides a focalpoint for all captive-related enquiries

The range of strategic captiveconsulting services provided, include:

� Co-ordination of and assistance withthe preparation and delivery ofcaptive feasibility studies and othertechnical reports.

� Strategic analysis on merging,moving and dissolving captiveoperations.

� Detailed reviews of all captivequality standards with approvedbenchmarks.

� Strategic reviews of non-traditionalbusiness risks to maximise thecaptive potential.

A range of actuarial & analyticalconsulting services are provided:� Calculation of captive premiums and

premium allocation betweenbusiness units.

� Loss forecasting & risk analysis todetermine the expected losses to beincurred by each class or businessunit and the variability around theforecast.

� Loss modelling and financialmodelling of the captive to determinethe cash flows to the captive;reinsurance programme design andfor capital adequacy requirements.

� Risk retention analysis to determinethe appropriate captive deductiblelevels on an each and every loss basisand an aggregate basis.

� Benchmarking of captives’ lossexperience and comparison by

business class can also be drawnagainst industry data where this isavailable.

The Indian scenarioFollowing the Gujarat Earthquake

in 1999, and in the light of India’svulnerability to growing losses due tonatural disasters and escalating fiscalpressures at the central and state levels,the World Bank undertook a detailedreview of India’s catastrophic exposures.The goal of this project was to examinethe loss potentials from naturaldisasters and to consider theopportunity to apply enhanced countryand state level risk managementtechniques, with a particular emphasis

on the financing of post disasterreconstruction and the efficientallocation of public funds.

The role of the insurance market wasalso examined given their majorcontribution to effective risk transfer ofcatastrophe risks in other countries butthe relatively small role played byinsurers in India so far. Among therecommendations made by this study,was to develop models to a greaterdegree of detail to assess vulnerabilitymore accurately.

The main challenge that had to befaced in developing models to preciselyassess the risk for India was theavailability of accurate data. But thisis changing now. A recent visit to theIndian insurance companies in the

public and private sector revealed thatthey are now desirous of overcoming theconstraints of data collection andcollation. With the expansion ofcomputerisation, the main hurdle to thecreation and maintenance of reliabledata on losses has been removed. Thetime is therefore ripe for the introductionof modelling capabilities for betterassessment of catastrophe exposures.

At present there are no modelsspecific to India but the day is not farwhen all the insurance companies inIndia actively support and createconditions conducive to the developmentof catastrophe models for earthquake,typhoons and other natural perils.

In conclusionReinsurance programme design and

consultancy services of Aon Global (inIndia) and Aon Re Services (in the AsiaPacific Region) build on the expertknowledge database of Aon Re globally.

The principle advantage of bringingthese skills and resources together is toenable Aon Global in India and the AonRe Services in the Region to providesolutions across the entire riskcontinuum, based on integratedtechnical and financial analysis of clientrisk exposures. This leads to theimplementation of products, whichcombine some, or all of risk transfer,insurance and financing and assistsclients in ensuring the most efficient useof their risk capital.

A recent visit to theIndian insurance

companies in the publicand private sector

revealed that they are nowdesirous of overcoming the

constraints of datacollection and collation.


Sources of riskDesigning any strategy to manage

future risks of any organisation need theunderstanding of the risk and theirorigin and direction – linked to ourenvironment, which is quite dynamic.

The world changes so fast thatneither information systems normanagement practices are able tocapture the potential trend and thedirection of the change. This leads touncertainty and inability to initiateproactive measures. The major changesthat have been noticed are: changes indemographic structure – mortality, lifestyle, killer diseases (like AIDS andSARS) impacting the demographiccomposition; impact on financial

services of rapid globalisation,information explosion andunanticipated volatility in financialmarkets. These changes have made theLaw of Averages, which has beentraditionally used by Life InsuranceCorporation (LIC) to discount theimpact of risks, has become nearlyredundant and therefore, there is asearch for a new model methodology andmanagement strategies to face thechallenges of various types of risks thatare being confronted by insurancecompanies.

As we proceed to discuss strategy,let us examine the import types of risksand their sources:

Types of risksIt is virtually impossible to provide

a list of risks in life insurance operationbasically due to the fact that risks areassociated with multidimensionalchanges associated with the factorsmentioned above. However, the majorfocuses of risks of insurance businessare related to macro-economic factors,

pricing, claims, credit, spreads, andinvestment risks which can be classifiedin two ways: one from the actuarial pointof view and the other from the financialmarket point of view.

Actuarial view of risks are basicallyclassified as:� Asset – Liability Risks: arising from

mismatch between assets andliability of an insurance companydue to fluctuation in interest rates,inflation causing changes in value ofassets and liabilities.

� Asset Risks: arising from default ofborrowers causing or decline inmarket value of investment assets.

� Pricing Risks: arising fromuncertainty in mortality, claims,leakages, management expensesand income from premium,investment and real estate.

� Miscellaneous Risks: arising fromchanges in regulatory regime andrequirements, taxation,malpractices at operational leveland inefficiency in managementpractices, lack of accountability andfiduciary responsibility.

Financial view of risksThe actuarial concept of risks asmentioned above can however bebroaden and decomposed into six generictypes from the financial sectoreconomists view these risks are:� Actuarial Risks: associated with

issuance of insurance policies andrelated liabilities. These risks arisedue to higher cost of raising funds,higher underwriting losses thanprojected etc.

� Systematic or Mack risks:associated with asset liabilitymismatch, arising out of changes ininterest rate, inflation etc.

� Credit Risks: associated withdefault of borrowers of funds.

� Liquidity Risks: associated withfunding crisis arising out ofunforeseen demand for funds to meetobligations.

� Operational Risks: associatedclaims processing, settling, record

During the last few years, one of themajor concerns of regulators, managersand customers in the financial servicesindustry has been that of riskmanagement. The concern for riskmanagement in financial institutionsstarted in 1984, when R. Stucz publishedhis epoch making article “OptionalHedging Policy” in the Journal ofFinancial and Quantitative AnalysisSuggesting ‘a viable reason for objectivefunction concavity.’

Since then a number of expertshighlighted the concern and rationale forrisk management. The concept of riskmanagement in the insurance industry,like banks, mutual funds, pension fundsand other financial entities (FEs) hasemerged as the most important area offocus, and several initiatives have beentaken at the regulatory and enterpriselevel to identify, measure and managethe risk that are emerging like anepidemic all over the world.

However, in India there is yet todevelop the kind of seriousness thatobserved in the developed markets. Ithas not attracted required attentioneither at the regulatory or at theenterprise level. This article is anattempt to briefly discuss the threats ofvarious risks, the tools to measuresthem and the practices to manage themand suggests a risk managementframework for indian life insuranceindustry.

Risk management is a broad conceptencompassing the objectives ofrisk management, sources of risks,risk management, oversight ofimplementation of risk policy etc.Though ideally risk elimination wouldbe the key objective of risk management,in reality it is totally impossible toeliminate. Therefore a realistic objectivewould be to attempt to reduce theintensity of risk, if not total elimination.The central objectives of a riskmanagement policy are to maximise theshareholders value and risk adjustedreturn and to minimise volatility relatedto covering.

��

Life RiskDr. H. Sadhak

— Risk Management in Life Insurance

However, in India there isyet to develop the kind of

seriousness that is observedin the developed markets.


��

keeping, risk relating to delivery ontrades in exchanges etc.

� Legal Risks: associated withfinancial contracts, frauds, violationof regulation etc.

Measuring RiskRisk management however, calls for

risk identification and risk measures.A number of methods have been in useto measured the risks in an insurancecompany, though there is no single bestmeasure yet like VaR (Value at Risk)which is widely used for bankingindustry. Most widely used measures ininsurance companies are:

� Actual and Expected ExperienceMonitoring

� Risk Based Capital (RBC)/Ratios/Target

� Scenario Analysis� Stress Testing� Cash Flow Testing (CFT)� Cash Flow Matching (CFM)� Duration and Convexity Analysis� Performance Attribution/Exchanges

by Source

In A/E ratio analysis actualexperience to budget plan and pricing ismonitored to see to what extent liabilityassumptions are met. In RBC analysis‘the ratio of RBC to adjusted statutorysurplus is used as the standard forsurplus adequacy related to risk’. Inscenario analysis liabilities and assetsof a portfolio is examined under differentmacro-economic assumption, whilestress testing is conducted by usingscenario to find out extraordinary lossesarising out of a particular widely usedto examine the whether asset inmatching the liabilities of a portfolio.

Under CFT analysis, basic asset/liability analyses are undertaken toverify that sufficient reserves aremaintained particularly for generatedincome controls (GICs) and annuityproducts, while under CFM liabilitiesare matched with cash flows. There aremany other measures to monitor theportfolio risks – and normally a set ofmeasures are simultaneously used by a

company. While in convexity analysisthe price sensitivity of duration to achange in the interest rate is monitored,in duration analysis price sensitivity ofportfolio or security is examined inreturn to change in interest rates.Performance attribution test isconducted to find out the risk factorscausing losses by comparing the actualperformance with pre-designedperformance.

Risk management practicesLike Risk management methods

there are a variety of techniques usedby the insurance companies to managerisks. According to Babbel andSantomero of Wharton School, ‘itappears that a common practice has

evolved such that four elements havebecome key steps to implementing broadbased risk management system.’� Standards and Reports – setting up

underwriting risk classification andreview standards andstandardisation of financialreporting system.

� Underwriting Authority and Limit– to exercise internal control onmanagers.

� Investment guidelines andstrategies – to exercise control overdesired asset liability mismatch.

� Incentive Scheme – to relatecompensation to risk and earnings.

Since there is no uniform techniqueto manage the entire gamut of risks inlife insurance company there are severalmethods and developed practices tomanage actuarial risks, through pricingsystem, solvency margin etc. However,

recent developments indicate that‘static assumptions regarding lossdistribution failed to manage risksarising out of interest rate volatility.Another risk factor is the incentives toagents and marketing staff whichencourages them to sell more newpolicies, replace old polices, and all theseincrease the overall risks for thecompany.

In the areas of systematic risks, topon the list of risk management techniqueis the Asset Liability Management(ALM) because it not only covers interestrate volatility but also non-interest risksarising out of embed options in thepolicy. Further, ALM is used to manageproduct specific risks as well as companywide risks.

A survey of global consulting firm,Milliman USA, of Risk ManagementPractices of US Life Insurancecompanies shows that more than 75 percent of the companies indicated thatthey use the following Risk Managementpractices :

� Risk Insurance� Diversification of Assets� Diversification of Liabilities� Selective underwriting� Continual Process Improvement� Hedging via Capital Market� Stochastic Pricing� Risk Adjusted Pricing Targets

Risk limits set the maximumexposure to risk factors and risktolerance of the Management.Reinsurance allows risk transfer toanother party through an reinsuranceagreement. Diversification of assetsminimises the impact of unsystematicrisks on the portfolio whilediversification of liabilities is achievedby offering diverse products. Hedging incapital markets is aimed at reducing theadverse impact of interest ratefluctuation achieved throughderivatives, futures, forward trading,options and swaps.

It may be mentioned here thatinsurance supervision, to strengthen the

It is necessary to createawareness about the

necessity of riskmanagement as well as todevelop expertise in this

discipline.


risk management practices, focusesmore and more on the capital of aninsurance company against the benchmark of assured risks in addition to thestatutory solvency margin. In the US,the risk based capital laws now in effectin all states require commissioners totake specified actions when a firms’ riskbased capital ratio, defined as the ratioof actual ratio to risk based capital, fallsbelow a certain threshold (Cumming,Philips and Smith 1997). Even inEurope, the solvency project is centredaround the risk based capital model: Ina capital based solvency system, riskbearing business will be linked to morerisk capital.

Risk management scenario in IndiaSo far in India, very scanty attention

has been given to risk management ininsurance companies. Neither is anysystematic and structured riskmanagement practice followed ininsurance companies nor have anyspecific guidelines on risk standards,techniques and risk management beendeveloped. Of course IRDA guidelines onInvestment Management and Asset,Liabilities and Solvency margin ofinsurers indirectly deal with RiskManagement. The risk managementprevailing in Indian companies is of avery rudimentary type. Indian financialmarkets, particularly during the postliberalised era have witnessedsignificant understanding. Globalintervention, changes in interest rateregime etc. have increased the riskexposure. It is therefore necessary tocreate awareness about the necessity ofrisk management as well as to developexpertise in this discipline.

However, risk management practicescan be successfully implementedthrough institutionalisation of the riskmanagement culture and creating anecessity for adopting it. Managementmay also consider introducing certainincentives and disincentives – incentivesfor maximising policyholders’ returnthrough risk management anddisincentives for non-implementation ofrisk management which adversely affectasset value and policyholders’ benefits.

Risk management has its cost also andthey include the cost of professionaltraining, technology, time and shortterm losses due to rigid implementationof risk policies. However managementsshould be willing to bear this cost in theirown long term interest.

In view of the poor state of the riskmanagement practices in India, thefollowing steps are urgently required.

Risk standardsA uniform practice of risk

management needs to be introducedthrough the life insurance industry. Thiscalls for introduction of InsuranceIndustry Risk Standard (IIRS)incorporating the entire gamut of riskmanagement and risk oversight.Risk Management must include the

fiduciary responsibility of board andmanagers, risk management objectives,responsibilities of various entities,checks and balances, independentrisk oversights. For these, there is needfor adequate education and trainingwhich also may preferably be uniformindustry wide.

OversightIndependent review of risk

management practices and riskmeasurements are required at frequentinterval by the primary fiduciary andmanager fiduciary. This review shouldinclude analysing policy compliance, duediligence, monitoring investmentguidelines, investment strategies, risklimits, evaluation of investment models.If required, revision redesigning ofmodels, strategies, risk limits may bedone within the overall guidelines and

parameters of the regulator.

Institutionalising Risk ManagementRisk management practices can be

institutionalised by separating RiskMonitoring (RM) from operationalfunctions. Monitoring should beentrusted to the entity not involved inoperational matters. Thoughimplementation will be reviewed by theprimary fiduciary like board, topmanagement, yet there is a necessity forindependent monitoring throughdesignated person. Many organisationsappoint a Chief Risk Officer (CRO) whois a reasonably senior level executivereporting to the chief executive of theorganisation. However, for bettercoordination and monitoring a riskmanagement committee (RMC) can beset up, which would be assisted by theCRO. RMC would be a high powercommittee report directly to the boardon quarterly basis. RMC would monitorimplementation of Risk Standard, RiskLimit, ALM, measures, analyseinvestment strategy in relation toportfolio objectives and predeterminerisk limits.

Risk GovernanceThe risk management system to

protect assets from depletion may bemade stronger through implementationof risk governance. Risk governance canbe established either through ‘riskcontrol’ or through ‘risk reward’. In eitherof these models, there is a necessity forimproving risk knowledge, riskinformation and competitive riskpractices. Genuine risk reporting andstarting of risk information willstrengthen risk governance. However,the goal of risk governance can beachieved if the top management andboard are truly interested and sincere.

Risk management should not bethought and the regulatory requirement,but an integral part of strategy and wayof corporate life.

��

The author is Executive Director ofthe Life Insurance Corporation ofIndia in charge of the ManagementDevelopment Centre.

Independent review of riskmanagement practices and

risk measurements arerequired at frequent

interval by the primaryfiduciary and manager

fiduciary.

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Public Sector – Life InsuranceLIC of India has made policy

servicing systems operational allover its branches. Its keytechnological initiatives havebrought in sea changes in the recentyears. These include:

� The introduction of front-officecomputerisation, progressively forvarious modules of businessfunctions made the transactionprocessing faster and easier. Forexample, cash transactions arequicker instead of long waits inqueues and inter-branchtransactions limited to premiumsare accepted. Revival andquotations are generated faster.Errors have been controlledconsiderably. All the front officemodules (Cash, Revival, Claims,SSS, New Business, Policy Issue,Commission processing) havenoticeably helped, improvingcustomer service.

� Metro networking and wide areanetworking has made transactionflow countrywide; a policyholdercan make payment for his policyin any office in the country. Thisis particularly useful incircumstances where apolicyholder has multiple policiesin different branches, which isusually the case in a city or amajor town with more than onebranch.

� Internet premium collectionparticularly for NRIs.

The following areas wouldrequire technology advances� Reduction in paper documents as

many registers are still printed

� Streamlining commission forpolicies serviced in offices other

than the home division of theagent

� Automated action on policyoptions such as removal ofaccident benefits

� Client-centric premium renewalor other notices – singledocument for all policies togetherheld by a customer

� Control over policy dockettransfers (imaging could be asolution to get over docketmisplacement)

� Standardisation of policy formatthrough electronic publishing

� Additional payment methodssuch as bank debits and creditcard

LIC is seriously pursuing itsefforts on portal to provide a single,personalised point of interaction tothe customers, agents, andemployees. It benefits will includepayment gateway, requests toservice applications, easier upload ofdata, management tool for the field,and business information dashboard.LIC is also implementing a massivedata warehouse to support corporateinitiatives in performancemanagement and the like.

Public Sector – GeneralInsurance

“Computerisation in the Indiangeneral insurance industry has not

made much progress. Theimplementation… has been slow…attributed in varying degrees to…technical manpower shortage,inadequacy of hardware, frequentchanges made in the software, andlack of maintenance support fromhardware vendors.”

All the above handicaps nolonger apply. Until some yearsback, transaction processing andmanagement informationcompilation were partly manual andpartly mechanised. In the recentyears, processes like proposalcapture, policy printing, generationof renewal notices, receipts andvouchers, and consolidation ofaccounts have been computerised.Policy transactions (front endoperation and back office functions)have been shifted to computerisedsystems.

New India Assuranceimplemented a package applicationfour years back. It has relievedmanual operation to a good extentand brought in transactionefficiency in all operating offices.The same package runs in two ofthe other public sector companies(viz. United India and National)where the business processes andproduct characteristics are almostthe same. Oriental Insurance hasdecided upon a different softwarechoice, which is expected to be fullyoperational by 2005. At present itsin-house application software meetsrequirements.

It is understood that all thesecompanies are planning to networktheir local databases. Somecompanies are contemplatingworkflow management for selectivebusiness transactions. While

IT in InsuranceM. Arunachalam

��

— The Indian Experience

LIC is seriously pursuingits efforts to provide a

single, personalised pointof interaction to the

customers, agents, andemployees.


��

Oriental Insurance proposes to havea central database connected toall its operating offices, the otherthree companies have branchlevel databases, which will benetworked for data transfer. Boththese models have their meritsand demerits. In the former,network traffic among others willrequire special consideration and inthe latter, data is unconsolidated,and analysis and reporting cannotbe performed without creatinga centralised repository. Willthey overcome these drawbackseffectively, and if so how soon?

It is gathered that these areas inthe existing package applicationneed attention.

� It is not client based, but contractbased; will not allow view of allpolicies of a client

� Reports are pre-defined; in thechanging market and dynamicsituation, executives at all levelsneed reports, statistics and plentyof information. Options areavailable to generate ad hocreports but have not beenprovided.

� For changes to products andcustomisation of new products, alifecycle process and vendorsupport are still needed, asagainst the present trend thatany packaged software allowseasy customisation by the client-company

� All systems work in standaloneoffices, as of now. Without acomplete network, crunching ofdata for the company as a whole isnot possible. Data warehouse is amust in an emerging situation andthis will require a consolidation ofdata in a common repository for

the organisation as a whole for aneffective, complete managementinformation, actuarial analysis,easy generation of statutoryreports, and so on.

It is gathered that the packageapplication will have an enterpriseversion and that will take care of adhoc reports and consolidation ofinformation through network.

Currently the rates are set andcontrolled by the Tariff AdvisoryCommittee (TAC) for many lines ofbusiness in general insurance. Whenthe industry is heading towards

detariffing, and when a largenumber of products are introduced,the system will require a powerfulrating engine.

In addition, the system shouldprovide client-centric features,management information, anddecision support, built-in controlsincluding fraud-detectionenvironment, and compliance withregulatory norms, and at anappropriate stage documentmanagement solution etc.

The system has to address areaslike prompt accounting ofreinsurance claims, statisticalanalysis of risks, rates, andexperience. The requirements willchange as the broker distributiongrows in a big way. Similarly, there

will be greater need for interfacingwith the external world such asbusiness partners, surveyors andadjusters, reinsurers, crimebureaus, government agencies, andthe regulatory authority.

Public sector - reinsuranceGIC moving away from its age-

old applications has embarked onmajor technology initiatives that willenable it to redefine the way it doesbusiness with cedants and brokers.The initiatives aim at keepingbusiness transactions homogeneousand simple, and looking at processefficiencies.

GIC as in the case of manyreinsurers is keen on: accumulationand exposure control, DecisionSupport Systems (‘What if’ analysis),co-ordination of Treaty andFacultative business to manageaccumulations and accessingknowledge on reinsurance risks onglobal basis. Reinsurers around theworld have achieved considerablebusiness benefits by aligningbusiness objectives with IT, whichhas helped them to competeeffectively. The benefits of IT basedbusiness processes would also helpin improved quotation process,negotiation, binding of risk,consistent underwriting, and reliabledata to support decision-making andachieve straight-through processingincluding web-enablement.

The only answer is an integrated,high-end processing system.Currently, GIC of India is seriouslypursuing its efforts in implementingenterprise-wide solutions using SAP.

Private sectorMore than twenty companies are

in operation. Either they have foundsystems as with their foreign

The first priority forIndian insurers is a well-designed and integratedcore operational system

particularly for policy andclaims administration.


alliance partners acrossMainframes, AS/400, and Client/Server (such as LIFE/Asia 400, Asia,SOLCORP Ingenium, S3) or haveembarked on their own developmentincrementally. Most of them havecentralised databases. Some of themhave web enabled facilities like on-line premium calculation and othersophisticated features.

None of the systems as existingabroad can easily fit into Indianbusiness conditions and most of thesesystems if not built custom-specificrequire massive customisation.Environment, architecture andfunctionality are different with eachinsurer, and these are yet to be fullystabilised. In-depth analysis is morerelevant in respect of privateinsurers who are all in the initialyears until they break-even.

It is gathered that the privateinsurers have evolved differentmodels for analysis such as strategicoperational business planning,business and performance reviews,capital projections and management,product pricing and expensesanalysis and so on whichincreasingly need IT. However, awell-built management informationsystem, which will have data fromall operation and analysis, stillremains to be established. Forinstance, to perform lapse analysis,queries have to be written and dataextracted and put in spreadsheet foranalysis. Ideally MIS to a greatextent should be the byproduct of thecore operational system. Excel isused widely as a tool for MISgeneration though variousanalytical tools are available in themarket for actuarial, financial andmarketing analysis.

Planning IT Strategy“As insurance is an information

intensive business, … insurancecompanies should improve theirtechnical proficiency by upgradingtheir information support and bydeveloping strong R&Ddepartments…the growth in trade,commerce, industry, and othersegments of the economy is throwingup an increasing volume of data. Theinsurance industry can usefullyhandle the large mass of data neededby it only if its informationmanagement is supported byinformation technology. This would

require a measure of futuristicplanning with the help of in-houseas well as outside professionals,going well beyond the presentlimited applications of computers.Managements… should acceptmeaningful computerisation as atotal managerial responsibility andadopt appropriate strategies for itsimplementation

Computerisation is capitalintensive where obsolescence oftechnology is rapid. The need forcareful long-term planning…withdue consideration to costs andbenefits cannot be overstated.”

The key management priorities will be� Demonstrating business values

of information technology andservices

� Developing leadership in thesenior IT team

� Strengthening IT and businesslinkage, and

� Making IT more serviceoriented.

Technology management hasto quickly learn what is importantby drawing on the best technicalpeople for advice and applyingjudgment in an overall businesscontext with right technologicaloptions. The decision to ‘Build orBuy’ requires serious consideration,which is a challenge.

The CIO (carrying different titles)has emerged as an importantmember of the company’s topmanagement. Such is his importancethat he is today required to sign theannual statements in the US. TheCIO in advanced countries providesneeded information and insight toorganisational heads so as to achievethe best use of technology. He bringsout his technology mission, strategyand tactical measures, to align withevolving business goals, andconstantly elicits opinion from allstakeholders. The CIO coordinates alltechnological aspects on ongoingbasis, advises on technological issuesthat the board or CEO raise and actsas an arbitrator in resolving anyinternal technological managementissues. The CIO as a technologicalvisionary:

� Ensures that the corporate andbusiness unit strategiesincorporate critical technologicalperspectives

� Gathers knowledge on currentand emerging technologies thatwill impact the competitiveposition of the company

��

Successful organisationsaround the world ensurethat their IT strategy andimplementation roadmap

are aligned to their overallbusiness vision.


The author is Advisor, Insurance, HCLTechnologies Ltd. The views expressedhere are his own.

��

The Way ForwardInsurers have to focus on the

following imperatives and considervarious technological optionsdepending on the business and ITstrategies.

� Core System: The first priority forIndian insurers is a well-designedand integrated core operationalsystem particularly for policy andclaim administration, with thesecharacteristics: user-friendly,efficient, consistently dependable,flexible to add on new products,easy to configure new features,networked for data flow,interfaced to an MIS repositoryand external agencies, and built inwith complete controls. Today,every insurer is looking ataugmenting or replacing thesystem for tight integration,component-based architecture,high levels of automation andsecurity over data, Internetenabling and ‘straight-through-processing’ plus the ability todeliver rule-based intelligence allthe way back to the point of sale.Though it is not easy to establishall the desired criteria, they needto be achieved to gain acompetitive edge.

� Client Interface: Equallyimportant is building of goodcustomer facing applications. Oneimportant requisite will be tohave more thrust on client’s viewrather than contract view. CRMtool is one option for achievingunified view of a customer. Theinterfaces will include agents,brokers, reinsurers, banks, andadjusters all of which enhancesoperational experience of thecustomers. On the distributionside, new channels will open up,

distributors will become Internetsavvy and will be empoweredto conduct more real timetransactions with access torelated products and services.

� MIS: The core operationalsystem should automaticallyprovide the data needed forreporting, analysis andintelligence. It should helpcompanies spot the exceptionaltrends, such as high expenseratio, heavy lapses, adverse lossexperience and instances offraudulent claims.

� Industry Collaboration: Animportant requirement will bea common database that willserve as information pool towhich individual insurers willsupply data and requestinformation. Examples of suchinformation providers in US are:Choice Point (for claimsinformation), Insurance ServicesOffice (for a variety of serviceslike common policy formats),Department of Motor Vehicles(for motor vehicle reports),Medical Information Bureau (forhealth information), Intellisys(for tele-interviews) and so on.

The US has developed a commondatabase that containsinformation on approximately 3.3million insurance agents.

In India, TAC is reported to bebuilding a database for declined lives.An industry-wide, concerted effort isneeded to stamp out insurancefraud. When multiple insurers nowoperate in India, information has toflow in and out to such industry-widedatabases. Further, the criticality ofstatistics like mortality, morbidity,and experience, and lapse analysisfor the entire insurance industryneeds no special mention. IT systemsshould havestrong foundation to provide for sucheventual requirements.

Finally, the importance ofintegrating people with technologyneeds no emphasis. Even the bestsystems will fail if they arenot synchronised with companystructure and staff expectations fromtechnology.

Successful organisations aroundthe world ensure that their ITstrategy and their implementationroadmap are aligned to their overallbusiness vision. IT strategies cansucceed only with the topmanagement commitment, keystakeholders’ participation andCIO’s vision.

Concluded

The importance ofintegrating people with

technology needs noemphasis. Even the best

systems will fail if they arenot synchronised withcompany structure andstaff expectations from

technology.


��

Report Card:GENERAL

�� !�"��"#�$��%�&��

(Rs.in lakhs)

PREMIUM 2004-05 PREMIUM 2003-04 MARKET SHARE GROWTH %INSURER FOR UPTO FOR UPTO UPTO JULY, 2004 YEAR ON

JULY 04 JULY 04 JULY 03 JULY 03 YEAR

Royal Sundaram* 2,603.35 10,724.00 1,800.14 8,849.00 1.68 21.19

Tata AIG* 4,098.99 17,720.06 2,401.07 13,821.69 2.78 28.20

Reliance General 994.18 6,229.73 1,605.50 6,834.01 0.98 -8.84

IFFCO-Tokio 3,534.24 17,243.98 2,417.16 12,891.28 2.71 33.76

ICICI lombard 6,682.74 28,731.12 3,142.48 15,757.90 4.51 82.33

Bajaj Allianz 5,567.94 26,599.16 4,183.56 16,088.31 4.17 65.33

HDFC 1,535.03 5,319.38 746.26 1,938.95 0.83 174.34

Cholamandalam 1,527.57 6,154.74 615.66 3,031.41 0.97 103.03

New India* 31,441.00 1,40,488.00 29,867.00 1,35,575.00 22.05 3.62

National* 32,985.00 1,39,112.00 27,875.00 1,11,216.00 21.83 25.08

United India* 25,731.00 1,11,533.00 29,834.00 1,15,244.00 17.50 -3.22

Oriental* 27,427.34 1,11,334.97 24,929.41 1,05,790.62 17.47 5.24

ECGC 4,537.68 16,059.82 3,745.79 13,195.12 2.52 21.71

TOTAL 1,48,666.06 6,37,249.96 1,33,163.03 5,60,233.29 100.00 13.75

* Data revised by the respective insurers for the corresponding month of the previous year.

G. V. Rao

Growth drops to 12 % in July

Performance in July 2004The growth rate and the quantum of

accretion in the month of July 2004 haveboth dropped from what was achievedin June 2004. While it was an accretionof Rs. 194 crore (16.5 per cent growth) inJune 2004, it is only Rs. 156 crore (11.7per cent growth) in July 2004. The newplayers had recorded Rs. 88 crore (58per cent growth) in June have yet againrecorded a healthy increase of Rs. 97crore (58 per cent), contributing theirsignificant part to the industry’sperformance in July.

A growth rate of 11.7 per cent for July2004 is lower when compared to the

recorded growth rate of 13.75 per cent,as at the end of June 2004.

Established companiesWhat has been the reason for the

overall lowered performance of themarket? The established players haverecorded only Rs. 58 crore (five per centgrowth—without ECGC it is 4.4 percent) in July compared to theirperformance in June of Rs. 93 crore (9.4per cent). United India in July has losta premium of Rs. 41 crore (-13.7 percent) and this has pulled down thissector’s overall performance. Thisshortfall has been made up byOriental’s growth rate of 10 per cent and

that of National Insurance of 14.7 percent, a relatively subdued performanceby the latter compared to itsspectacular earlier growth rates.

With National Insurance showinga lower growth rate and the UnitedIndia actually decelerating has thrownup new concerns about the performanceof the group as a whole.

New companiesAmong the new non-life insurance

companies, a pattern seems to beemerging with ICICI Lombard, with anaccretion of Rs. 36 crore (116 per cent)in July continuing its pronouncedaggressive march, widening its lead


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further by another Rs. 12 crore over itsnearest competitor Bajaj Allianz, whichrecorded an accretion of Rs. 24 crores.Tata AIG and Iffco-Tokio seem to be inone league with accretions of Rs. 17 andRs. 11 crore respectively. The newplayers seem to be on a consistent courseof not only showing high growth rateseach month – which can be attributed tothe relatively low base - but adding tothe performance accretions of themarket in quantum as well.

The ECGC has maintained itsgrowth rate of 20 per cent.

Performance up to July 200The quantum accretion of the

industry at the end of July 2004 isRs. 770 crore (13.75 per cent growth).The new companies’ contribution tothis quantum is Rs. 394 crore(50 per cent growth) and that of theestablished companies Rs. 376 crore(7.8 per cent growth). The growth rate atthe end of June was 14 per cent and ithas dropped slightly at the end of Julyto 13.75 per cent.

Among the new players, ICICILombard has completed a business ofRs. 287 crore up to July recording aquantum accretion of Rs. 130 crores,ranking next only to National Insurancethat has recorded an accretion of Rs. 280

crores, followed by Bajaj Allianz with Rs. 104 crores. United India that hadan accretion of Rs. six crore at the endJune has dropped its premium by Rs.37 crore at the end of July 2004; the onlyother insurer that has dropped inpremium quantum premium is RelianceGeneral.

ConclusionWhat would ultimately lift the

growth rate of the industry will largelydepend upon how well the establishedplayers perform in the future. With

The author is retired CMD, OrientalInsurance Company.

National Insurance’s growth ratedecelerating in July from the earlierunprecedented levels and with UIICdropping premium income rathersignificantly in July, the signalsemanating for the market are certainlydisturbing. One should hope that theseare exceptional happenings restricted tothe month of July and not necessarilywhat will emerge as future trends.

� http://www.irdaindia.org/irdajournal.htm

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(Continued from IRDA Journal,June 2004)

While on Current Assets, a cursorymention needs to be made on ‘the mostcurrent and the most liquid’ item of abalance sheet, which is ‘Cash in hand andbanks.’ Any reader of the financialsgenerally believes what he superficiallysees under this item to be true. However,this may not necessarily be so.

This item is largely influenced by thebank reconciliations at the end of theaccounting period. The balances thatappear are those as per the books ofaccounts and not as per the bankstatements. A statement ofreconciliation of balances between thebank statements and the books willalways be prepared at the end of theaccounting period. And this may containsurprises. There may be scores of itemsin the said reconciliation under the sub-heading ‘Cheques deposited but notcleared’ and the chronology may extendto the maximum permitted six months.(Older items are normally in an accountcalled ‘Stale Cheques account’ andgrouped inconspicuously under SundryDebtors or some such account to finallyform part of Current Assets.)

In all such cases, (of the cheques lyinguncollected by the bankers, for whateverreasons), the premium income wouldhave been accounted and agencycommissions been paid, Sec.64VBcompliances would have been certifiedand perhaps even claims settled! Ifprobed, most of these could be justsimple lapses in follow up but in somecases, it could even be deliberateattempts to ‘accommodate.’

In the only industry where creditselling is statutorily barred, these lapsesare more than just aberrations. BankReconciliations made routinely are notsupposed to be simple academic exercisesbut are to be used for probing andfollowing up many items that arebetween the cup (what is available asper the books) and the lip (what isavailable as per the bank records).Though it may not be entirelyappropriate to expect the insurancecompanies to include such reconciliations

The Balancing Act …..continues….in the financials, it will perhaps be inorder for them to make relevantdisclosures in the Notes section at least.

There could also be instances offunds that are in the pipeline of thebanking channels, where the amountsthat have been transferred from oneoffice but are yet to reach the other officeof the same company as on the date ofthe closing of accounts. These are called‘Remittances in transit’ and are alwaysgrouped in ‘Cash & Bank balances,’which, normally will get cleared in a fewdays time, soon after the new accountingyear begins.

However, only very rarely a situationlike what happened in a nationalisedcompany for the year ending March 31,2003, where the statutory auditors hadobserved that no details were available(on the date of signing the balance sheet,

which was a comfortable four monthsaway from the date on which thecompany closed the accounts) an amountof Rs.400 lakhs shown as ‘Remittancein transit.’ That this was a very seriousirregularity mentioned in a matter-of-fact manner, one which did not even elicita comment from the CAG auditors orany explanation from the managementis, of course, an entirely different matter!

InvestmentsOne of the most significant items

appearing in the Balance Sheet is‘Investments’ and it is indeed veryinteresting to note how the variouscomponents of Investments arerepresented in Balance Sheets. Mostunarguably, an insurance company’smajor activity is to keep invested itssurplus funds at all times and ensurethat the returns of such investments aremaximised to the extent possible.

(Especially, in the recent past, it is onlythe investment income that issustaining many an insurance company,with the mainstay occupation viz.,insurance, becoming a losingproposition.)

An insurance company’sinvestments are made in differentforms such as real estate, governmentsecurities, treasury bills, mutual funds,loans to industrial undertakings andvery importantly in the capital marketstoo. The spread normally helps tobalance the portfolio between safety,liquidity and returns. (To ensure ajudicious spread, there have alwaysbeen statute-regulated parameters,both in the pre and post-IRDA days.)

In the pre-IRDA scenario,investments were mostly carried atcost in the Balance Sheet withoutfactoring in any possible impairmentloss. Only in some extreme situations(like investments in equity of companieswhich are sustaining losses for threecontinuous years and whose capital hasgot impaired or of those companieswhose audited accounts not madeavailable etc.), writing down of thevalues used to be resorted to. Of course,the financials would include astatement mentioning the marketvalues as on the date of balance sheet,more as a disclosure.

However, the post-IRDA scenariosaw a sweeping change in therepresentation of investment valuesin the Balance Sheet. The Regulationson Financial Reporting made distinctcanons in respect of determinationof values of different class ofinvestments such as (a) real estate, (b)debt securities, (c) listed securitiestraded in active markets and (d)unlisted securities and those otherthan actively traded.

In case of real estate, the historicalcost method factored by depreciationand impairment loss, if any willbe reckoned. However, the regulationsalso require the disclosure of thefair value and the basis of itsdetermination.

P. S. Prabhakar

In the only industrywhere credit selling is

statutorily barred, theselapses are more than just

aberrations.


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Debt securities (includinggovernment securities and redeemablepreference shares) are valued on theassumption of ‘holding them to maturity’and hence carried at historical cost.

Before dwelling on the moreinteresting third category, let us see howthe fourth category, which comprisesunlisted securities and derivatives andthe listed of those but not traded‘actively’ is dealt with. Basically theseare also carried at historical cost, withprovision being made for possiblediminution in values. The regulationsalso permit reversing of such provisionsin subsequent periods if circumstancesjustify, subject of course, to the limits ofthe historical costs.

The listed securities and derivatives,the regulations say, are to be measuredat ‘fair value’ on the date of the balancesheet. This is where we see a hugedeparture from traditional reportingmethods. The ‘fair value’ of a securityshould be its lowest of the last quotedclosing price taking into account pricesat all the stock exchanges where thesecurity is listed. This, in effect meansthat the valuation of the listed securitiesfor the purpose of representing in theBalance Sheet will follow the fortunesof the stock markets.

However, the resultant effect of thechanges (unrealised gains or losses)between two balance sheet dates, istaken as ‘Fair Value Change Account’and grouped under the Equity of thecompany. In the interests of prudence,the regulations provide that while thefavorable balance in this account shallnot be available for distribution asdividends, any unfavourable balanceshall have to be reduced from profits /free reserves of the company whiledeclaring dividends.

Only when disinvestments areactually made will the profits on suchdisinvestments which shall include theaccumulated changes in the fair valuepreviously recognised, be accounted asrevenue in the Profit & Loss account. Tillthen, the adjustments in the valuationof securities on the basis of the Fair

Value will be ‘within the Balance Sheet.’

A discerning reader of an insurancecompany’s balance sheet will have tocarefully analyse the investmentportfolio, study the accompanyingschedules (8 and 9), especially withreference to the previous year’s figuresand also look at that part of the CashFlow Statement that deals with‘Investing Activities’ to find out how thecompanies have been performing in thiscrucial area of investments, what kind ofsecurities are being disinvested, howmuch ‘provisioning’ is done forimpairments, whether the ‘Notes onAccounts’ carry adequate disclosures onvalue diminutions or sub-standardassets and how prudently the investmentactivity has been carried out.

IRDA, as the regulator as well as thecustodian of the policyholders’ funds,will be very concerned with the way thecompanies follow the IRDA’sregulations not only in making theinvestments but also in the adequatereporting in the financial statements.This is because, behind the façade of theseemingly water-tight regulations,insurance companies can still be smartenough to master ‘work-around’solutions to ensure they eat the cake andshow that they have it too.

Policyholders’ FundsThough it is gratifying to note that

the IRDA’s regulations on FinancialReporting have, for the first time, given

a sort of statutory recognition to thedistinction between Policyholders’Funds and Shareholders’ Funds, it isindeed perplexing that the format of theBalance Sheet recognises it anything butappropriately. It is common knowledgethat the Policyholders’ Funds compriseTechnical Reserves (Unexpired RisksReserves of fire, marine andmiscellaneous portfolios) and theamounts provided as ‘Estimatedliability for Outstanding Claims in theaforesaid departments.’ For one, theformat is designed in a casual mannerby including the technical reserves in‘Provisions’ along with other provisionslike ‘Provision for Taxation,’ ‘Provisionfor Outstanding Expenses,’ ‘Provision forDividend’ etc.

Secondly, the other importantcomponent of the ‘Estimated Liabilityfor outstanding claims’ forms part of‘Current Liabilities,’ where it keepscompany with hazy items like Agents’Balances, Inter-office Adjustments andBalances due to other insurers.

In the humble opinion of the author,it is indeed a pathological error toinclude both the ‘Unexpired RisksReserves’ and ‘Outstanding Claims,’together forming part of ‘PolicyholdersFunds” as negative items in ‘Applicationof Funds’ in the Balance Sheet. Theyshould have found a separaterespectable place in the ‘Sources ofFunds,’ which, indeed, they are. IRDA,in its next revision of the regulationsshould most definitely consider settingthis anomaly right.

With this, the discussion on the majoraspects of the Balance Sheet of a generalinsurance company that need a closerlook comes to an end. In the next coupleof tranches, let us have a look at theauditors’ reporting requirements andalso specific issues from the publishedfinancials of the insurance companies.

The author, who used to work with thenationalised general insurance industry,is a practicing Chartered Accountant.In this series he discusses the process ofanalysing the balance sheet of a generalinsurance company.

IRDA, as the regulator aswell as the custodian ofthe policyholders’ funds,will be very concerned

with the way thecompanies follow the

regulations not only inmaking the investmentsbut also in the adequatereporting in the financial

statements.


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The Gujarat-based DisasterMitigation Institute (DMI) hasannounced a new insurancescheme for small businessesto protect them from disasterslike floods and earthquake, itis reported.

Named ‘Afat Vimo’ or disasterinsurance, the scheme has beenlaunched as a risk transfer productby the institute set up in early1990s. The self-financing scheme

RBI PLANS TO RECAP DICGCFaced with runs in various banks, the Reserve

Bank of India (RBI) is reportedly considering optionsof carrying out a quick fund infusion in the DepositInsurance and Credit Guarantee Corporation of India(DICGC), whose coffers have been depleted by payoutsto depositors of failed co-operative banks. DICGC isan RBI subsidiary which insures deposits of all banksup to Rs One lakh per account.

Since amending the law for fund infusion to thecorporation could take some time, the central bank isinternally discussing a proposal with the Government,seeking an executive order to recapitalise theCorporation. After repaying depositors of several co-operative banks that failed, DICGC’s depositinsurance funds have shrunk to less thanRs. 700 crore.

After peaking to Rs 2,754 crore in 1998-99,DICGC’s insurance fund has steadily declined due tothe successive failures of co-operative banks. TheCorporation raises resources for providing this coverthrough a mandatory deposit insurance premiumcollected from all banks. At present, the premium isfive paise for every Rs 100 that is insured. Thepremium enables the Corporation to raise around 0.05per cent of the assessed deposits of the bankingsystem. DICGC remains a credit insurer only in name,as this part of its business is now defunct.

Since the deposit insurance premium is not enoughto generate a surplus, RBI is of the opinion that

recapitalisation is necessary until such time thatpremium rates are increased for weak banks. But theproblem is that DICGC — a subsidiary of RBI — is acreation of statute, which has fixed the Corporation’scapital at Rs Fifty crore. This means the RBI cannotindependently increase the net worth of DICGC byinfusing additional funds.

In 1999, RBI had set up a committee to reviewthe position of deposit insurance in India. One of themain recommendations of the committee was toincrease the deposit insurance fund of DICGC to twoper cent of insured bank deposits.

Last year, when the total deposits stood at Rs12,13,163 crore, the insured deposits amounted toRs 8,28,885 crore. This level of deposits will requirean insurance fund of Rs 16,000 crore, going by theRBI proposal of having a fund size of two per cent ofinsured deposits. The requirement will have gone upfurther, considering that bank deposits have swelledto Rs 15,81,288 crore.

Another proposal of the committee was that thecorporation should move away from charging a flatrate to a system where the premium would go up forweaker banks. The strength of a bank was to bedetermined by the extent of its capital adequacy ratio.The higher the capital, the lower was to be thepremium. The committee also wanted that DICGCshould be given the right to reject insurance cover forweak banks.

RBI PLANS TO RECAP DICGC

FOR SMALL BUSINESSES AGAINST DISASTERSwill cover 1,000 victims of disasterin the initial stage.

“Risk transfer initiative is aboutidentifying a vulnerable community,pooling its risks and transferring itto those who are not vulnerable tothe same risks and can absorb them,”said the institute’s director Mr.Mihir. R. Bhatt is reported saying.

“The scheme is aimed at insuringpoor and small businessmen againstloss of work, life, shelter and other

damages,” Mr. Bhatt said, addingthat India loses up to two percentof its gross domestic product and12 per cent of its revenues eachyear to natural disasters.

“The Calamity Relief Fund ofthe Indian Government spendsRs.12 billion each year towardsrelief to the victims of disasters,but the idea of insuranceagainst disasters is notcommon,” he said.


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‘Don’t merge PSU general insurers’‘Don’t merge PSU general insurers’‘Don’t merge PSU general insurers’‘Don’t merge PSU general insurers’‘Don’t merge PSU general insurers’Consultant AF Ferguson may oppose the view that the four state-

owned insurance giants should be merged, it is reported. Ferguson’sforthcoming report, expected by the end of the month, will thus opposethe merger idea put forward by Parliament’s standing committee onfinance.

The report, it is said, will instead focus on internal restructuring ofthese companies.

In its report last year, the standing committee had suggested themerger of the four state-owned general insurance companies, UnitedIndia, Oriental Insurance, New India Assurance and National Insurance.

The report would also form the basis for undertaking wage revisions.Promotions have been stalled despite an eight per cent drop in workforcedue to voluntary retirements.

The finance ministry had appointed AF Ferguson in May to preparea report on the four PSUs.

LIC SET TO ENTERLIC SET TO ENTERLIC SET TO ENTERLIC SET TO ENTERLIC SET TO ENTERFIVE NEW COUNTRIESFIVE NEW COUNTRIESFIVE NEW COUNTRIESFIVE NEW COUNTRIESFIVE NEW COUNTRIES

Life Insurance Corporation ofIndia (LIC), which has targetedfive per cent of its premiumincome from overseas operations,is set to enter five new countries,it is reported.

“We plan to enter countriessuch as Maldives, Botswana,Seychelles, Madagascar, Trinidadand Tobago Islands,” Mr. R NBharadwaj, Managing Director,LIC is reported saying.

“We have already set upoperations in Mauritius and wouldinitially service and acquireclients in Botswana, Seychelles,Madagascar and Maldives throughour Mauritius office. If we are ableto capture enough business inthese two countries, we would gofor joint venture operations in allthese countries where we intendto be large players,” he said.

“Initially we would appointbrokers and agents to cater toclients in these areas,” he said.Talking about Trinidad andTobago Island operations, Mr.Bharadwaj said it would beservices and catered from the Fijioffice which LIC had openedsometime back.

LIC was also considering asizable stake of the Europeanmarket from the London office.“We have started operations in theUK sometime back and would liketo cater to European countriesfrom there,” he said.

The same formula for openingup of companies in these countrieswould apply, depending on thevolume of business LIC managesto do.

LAW SOON TO REGULATE CLINICAL ESTABLISHMENTSLAW SOON TO REGULATE CLINICAL ESTABLISHMENTSLAW SOON TO REGULATE CLINICAL ESTABLISHMENTSLAW SOON TO REGULATE CLINICAL ESTABLISHMENTSLAW SOON TO REGULATE CLINICAL ESTABLISHMENTSThe Health Ministry is planning to come up with a legislation that

will certify and set standards for clinical establishments, it is reported.

Senior officials in the Ministry have been quoted saying that a newBill called the Clinical Establishment Regulations Act is in the offing.The Bill will have provisions for registration of hospitals, clinics anddiagnostic centres. It will ensure standardisation of procedures and alsopush for accreditation of healthcare centres. A certifying authority couldalso be set up under the new law.

The Health Minister, Dr. A. Ramadoss has also made it clear thatthe accreditation and standardisation of such institutions is top of theagenda. “Unless there is uniformity in standards and a comparable pricestructure among healthcare centres offering similar services, neitherwill health tourism nor insurance take off. Hence, the need for alegislation,” said the Ministry officials.

Meanwhile, the Confederation of Indian Industry’s (CII) NationalCommittee on Healthcare, in its last meeting, has also said that hospitalaccreditation should very quickly become a reality. India has the potentialto attract one million tourists per annum, which could contribute asmuch as $ five billion to the economy, said the chamber.

However, healthcare industry analysts are reported saying thathospitals are not willing to open up their books for scrutiny by externalagencies. “There is a reluctance among hospitals to show their financialaccounts or even permit hospital visits. Unless they do so, it will bedifficult to rate these institutions,” said analysts.


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Best Upgrades Lloyd’s Rating to ‘Best Upgrades Lloyd’s Rating to ‘Best Upgrades Lloyd’s Rating to ‘Best Upgrades Lloyd’s Rating to ‘Best Upgrades Lloyd’s Rating to ‘AAAAA’’’’’A.M. Best Co. announced that it has upgraded

Lloyd’s financial strength rating to “A” (Excellent) from“A-” (Excellent), and has assigned an issuer credit ratingof “a” with a stable outlook.

Lloyd’s management welcomed the decision asunderscoring the financial strength of the Londonmarket. In the wake of the decision Best also took anumber of rating actions on individual Lloyd’ssyndicates.

“The rating reflects Lloyd’s improving prospectivecapitalisation, strong operating performance, its globalreach and improvements in risk management,” said Best.The report noted, however, that a “partially offsettingfactor is Lloyd’s exposure to long-term uncertaintyrelating to the adequacy of Equitas’ reserves. But Bestsaid it thought it unlikely that this would adversely affectLloyd’s in the near term.

Best said it “believes the absolute level of centralsolvency capital (including the net assets of theCorporation of Lloyd’s, the Central Fund and thecallable layer) is likely to be increased to approximatelyGBP 2 billion (USD 3.7 billion) between 2004 and 2008.

Over this period, as part of Lloyd’s underwriting cyclemanagement strategy, underwriting capacity will mostlikely be reduced if market conditions continue todeteriorate.”

The rating agency added that it anticipates that“other sources of finance will be used to enhance centralcapital addition to members’ contributions (currentlycharged at 1.25 percent of capacity and paid into theCentral Fund).”

It also indicated that the rating “reflects A.M. Best’sexpectation that growth of the Central Fund is unlikelyto be materially affected by reserving issues relating toU.S. casualty business written between 1997 and 2001.In addition, Funds at Lloyd’s requirements for membersare likely to increase as a result of likely upward pressurearising from application of the risk-based approach tocapital developed by the U.K. Financial ServicesAuthority (FSA).”

Best cited Lloyd’s strong operating performance,noting that it “believes that Lloyd’s loss ratiodevelopment (including paid and outstanding claims)supports pure year results for the open 2002 and 2003

years of account above Lloyd’s current estimates of GBP1,670 million (USD 3,053 million) and GBP 1,780million (USD 3,254 million).”

For 2004 Best said it “expects substantial earnedpremium derived from the 2003 underwriting year andcontinuing good market conditions for Lloyd’s specialistclasses to support a combined ratio close to the 2003level of 89.2 percent and a profit before tax ofapproximately GBP 1.9 billion (USD 3.5 billion)(subject to catastrophe experience in the second half ofthe year).” It also “believes a combined ratio below 95percent is likely to be achieved in 2005, despite somedeterioration in loss ratios as rates reduce in a softeningmarket.”

In conclusion Best said it “believes that Lloyd’snow has a clearer focus on its downside with detailedperformance analysis; increased sophistication incapital modeling; a clear strategy for claims andreinsurance recoveries; management of open years andsyndicate run-offs, all contributing to an enhanced riskmanagement environment.”

BRITISH SURBRITISH SURBRITISH SURBRITISH SURBRITISH SURVEY FINDS INDIAN CVEY FINDS INDIAN CVEY FINDS INDIAN CVEY FINDS INDIAN CVEY FINDS INDIAN CALL CENTRES SALL CENTRES SALL CENTRES SALL CENTRES SALL CENTRES SAAAAATISFTISFTISFTISFTISFAAAAACTORCTORCTORCTORCTORYYYYYReporters of a British newspaper

conducted a survey on the performance ofinsurance major Norwich Union’s call centresin India and found them not only to besatisfactory but also cost-effective.

The snapshot survey was done byreporters of the Eastern Daily Press, andinvolved calling up numbers of the NorwichUnion and its main competitor Churchill, apart of the Royal Bank of Scotland group.

Norwich had sparked controversy whenit transferred thousands of Britain’s jobs tonew call centres in Bangalore and New Delhi.Customers said Indian staff were hard tounderstand and did not have enough knowledgeof the UK motor industry.

In letters to the newspaper, customershad complained of being left hanging on thephone, of impenetrable accents and havingtrouble with straightforward queries.

For its part, Norwich said the performance ofits Indian operations has been as good as itsBritish sites.

For the survey, the newspaper’s team ofreporters dialled NU Direct to get a car insurancequote, followed by another to either Churchill -which has all its call centres in Britain - or asimilar insurance provider.

Some calls were directed to Norwich’s call centrestaff in India and others to Glasgow or Liverpool.

All the reporters succeeded in getting quoteswithout much trouble, although the costssometimes varied wildly - in one case from £555to £1,068 for the same level of cover.

The consensus was that calls to Norwich’sIndian centres could take a long time, withseveral misunderstandings over language andaccents proving hard to decipher at times, butinformation did come by.

Indian call centre staff seemed eager to pleaseby offering cut-price rates and free productsthrown in.

The reporters found that young graduates,keen to sell large numbers of policies to newand existing customers, mainly staffedNorwich’s Indian call centres.

NU customer service director SimonMachell said the company had not seen anoticeable rise in complaints since the Indiancall centres came on line.

“As our Indian workers are getting moreexperienced, they are getting better athandling the calls, although we do not letthem on the phones unless they can have anacceptable conversation with the customer.We’re very happy with how the Indian centresare performing.”


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IMF URGES PAKISTIMF URGES PAKISTIMF URGES PAKISTIMF URGES PAKISTIMF URGES PAKISTAN TO IMPROAN TO IMPROAN TO IMPROAN TO IMPROAN TO IMPROVE INSURANCE SECTORVE INSURANCE SECTORVE INSURANCE SECTORVE INSURANCE SECTORVE INSURANCE SECTORThe International Monetary Fund (IMF)

has reportedly asked the Government ofPakistan to clearly demarcate responsibilitiesof the ministry of commerce and the SecuritiesExchange Commission of Pakistan (SECP) foreffective regulation of the insurance sector inthe country.

“The IMF has suggested that the regulatoryand supervisory responsibility for insuranceshould lie with the SECP and that oversightrelating to ownership and governance of thepublic sector insurers should rest withcommerce ministry,” an official source wasquoted saying in the Daily Times.

The IMF has suggested to the governmentthat future of the three public sector insurers

also needs to be reviewed. “The IMF is of theview that there appears little benefit inmaintaining the government monopoly of NationalInsurance Company (NIC) and the authoritiesshould consider developing an exit strategy,” theofficial said.

The IMF has suggested that it is also highlydesirable that the government limit its exposureto contingent risks entailed by PakistanReinsurance Company Limited (PRCL), possiblyby finding a private sector partner.

“However, the IMF has suggested that givenits (government) central role of the State LifeInsurance Company (SLIC) in mobilising fundsfor long-term investment, some form of arms-length ownership that does not distort the

contractual savings market would bejustifiable.”

The official said that the IMF is of the viewthat the insurance sector in Pakistan is highlyunderdeveloped. Insurance premiums per capitaof $1.0 for life and $1.7 for non-life in Pakistan isextremely low if compared with $11.3 and $3.0for India and $5.2 and $6.6 for Indonesia.

The Fund management has observed thatthe Insurance Ordinance 2000 has introduceda number of laudable reforms, but has alsoomitted a number of elements that are key to amodern risk-based supervisory regime. Thelatter include limited prompt corrective actionpower, lack of onsite supervision capacity andin-house specialist skills.

integrate the Internet communications channel,”said Bowler.

New for 2004, the customer satisfaction indexreveals that the customer experience is driven byfive factors: interaction with the provider; billing;policy offerings and initiation; cost; and claims.However, while only a fraction of consumers fileda recent claim, those who have tend to besignificantly more satisfied with their carriers thanthose who have not filed a claim.

“The claims experience is the moment of truththat drives a customer’s overall impression of theirinsurer, as well as their loyalty,” said Bowler.

Overall customer intent to renew their policywith their current carrier is at a four-year highand the likelihood to refer their provider to othershas recovered to a level last seen in the 2001study. Despite these high loyalty rates, nearly one-third of consumers, many spurred by a rate increase,report that they have shopped for a new providerin the past year. More than one-half of those whoshopped went on to switch their provider.

The 2004 National Auto Insurance Study isbased on 13,944 responses from auto insurancepolicyholders.

A small but growing group of customers areturning to the Internet rather than phone callsor office visits to communicate with their autoinsurance provider, according to J.D. Power andAssociates’ 2004 National Auto Insurance Study.

While only seven per cent of consumers areusing the Internet to check on or update theirauto insurance policies, their satisfaction ishigher than those who use an automated phonesystem. In addition, their satisfaction is onlyslightly lower than those who talk directly withtheir insurance agent or representative.

“The Web represents a highly efficientcommunication channel,” said Mr. Jeremy Bowler,director of the insurance practice at J.D. Powerand Associates. “It’s surprising that very fewcarriers appear to be successfully promoting itsuse for servicing customers.”

The study also finds that younger car insurancebuyers are fueling the expansion of Internetinsurance shopping. Forty-two percent of shoppersunder 30 used the Internet to shop for autoinsurance, compared to 29 percent of all shoppers.

“Insurance providers that are looking toattract new, young buyers, have to better

J.D. POWER STUDY:SATISFACTION HIGH FOR AUTO INSURANCE CONSUMERS USING THE INTERNET

TATATATATATTTTTA TO DEVELOP ISLAMICA TO DEVELOP ISLAMICA TO DEVELOP ISLAMICA TO DEVELOP ISLAMICA TO DEVELOP ISLAMICINSURANCE SOLUTION IN MALAYSIAINSURANCE SOLUTION IN MALAYSIAINSURANCE SOLUTION IN MALAYSIAINSURANCE SOLUTION IN MALAYSIAINSURANCE SOLUTION IN MALAYSIA

TATA Consultancy Services (TCS) said ithas been awarded a project worth RM$8.7milto build and develop a comprehensive Islamicinsurance solution, called Takaful IntegratedSystem, for Syarikat Takaful Malaysia Bhd.

Under the terms of the contract, the twocompanies will work together to develop andbring the system to Takaful Malaysia’ssubsidiaries, branches and associates in SouthAsia and the Middle East, as well as othertakaful operators in the Islamic insurancebusiness.

The new system is expected to be fullyoperational by mid-2005, TCS said in astatement.

The Takaful Integrated System will bebuilt on a J2EE (Java 2 Platform, EnterpriseEdition) architecture and will automateTakaful Malaysia’s business processes, suchas policy administration and claims processing.

Takaful Malaysia is the first operator tooffer takaful businesses in Malaysia and wasestablished from recommendations given bythe Malaysian Government’s Special TaskForce on the “Study for the Establishment ofan Islamic Insurance Company (Takaful).”


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L to R: Mr. C. S. Rao, Chairman, IRDA is welcomed with a bouquet by Mr. BharatJ. Boda, President, IBAI.

L to R: M.r C. S. Rao, Chairman, IRDA, Mr. Nigel Easton, UNCTAD and Mr. YoshihiroKawai, Director General, International Association of Insurance Supervisors (IAIS).

REGULATORS DO HOMEWORK

The first meeting of the members of the Insurance Brokers' Association of India(IBAI) was held in Hyderabad on July 31. A one day seminar on "Insurance Brokers:A Way Ahead" was conducted.

The Annual Seminar on Regulatory issues for senior officers of insurance regulatoryagencies was held in Delhi on July 15 and 16. It was organised by the Institute ofInsurance and Risk Management (IIRAM), IRDA, United Nations Conference onTrade and Development (UNCTAD), National Association of InsuranceCommissioners (NAIC) and the International Association of Insurance Supervisors(IAIS). Officials from insurance regulators' offices in over 20 countries participated.

BROKERS MEET

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Mr. T. K. Banerjee, Member (Life), IRDA

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Mr. Shivaji Dam, Managing Director, Kotak LifeInsurance on the high attrition rates in the industry

reported to be between 14 and 38 per cent.

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Mr. Jeremy Bowler, Director, Insurance Practice, J.D. Powerand Associates about a US study showing that younger

car insurance buyers are fueling the expansion ofInternet insurance shopping.

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Mr. Mike Kostoff, Executive Director, Corporate ExecutiveBoard's financial services practice on a study on the

profitability of mass insurance markets.

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An underwriter commenting on the insurance coverfor Athens Olympics which has broken the recordwith over $ 1 billion worth insurance coverage.

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Lord Peter Levene, Chairman, Lloyd's of London

Events

RNI No: APBIL/2002/9589

4 - 8 September 2004Venue: MonacoMonte Carlo Rendezvous

6 - 11 September 2004Venue: PuneData Warehousing and Data Mining by National Insurance Academy (NIA)

13 - 18 September 2004Venue: PuneInsurance Management of Infrastructure Projects by NIA

13 - 18 September 2004Venue: PuneResearch Methodology and Market Research by NIA

13 - 14 September 2004Venue: PuneC.D.Deshmukh Seminar on Agenda for Growth of Insurance Industry by NIA

11 October 2004Venue: MumbaiSeminar on Directors' & Officers' Liability: Trends, Risk andInsurance in a Changing Landscape organised by Institute ofInsurance and Risk Management, Hyderabad.

18 - 19 October 2004Venue: AgraThird International Symposium on New Technologies for UrbanSafety of Mega Cities in Asia organised by Indian Institute ofTechnology (IIT), Kanpur, and International Center for UrbanSafety Engineering, Institute of Industrial Science, University ofTokyo, Japan

27 - 29 October 2004Venue: HyderabadA Billion Lives to Cover: Working together to expand HealthInsurance in India organised by USAID, IRDA and Bearing Point.

1- 48 Pages (Sept Issue)Nimish Parekh Hasmukh Shah A.K. Venkat Subramaniam Prof. R.Vaidyanathan...

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Transcript of 1- 48 Pages (Sept Issue)Nimish Parekh Hasmukh Shah A.K. Venkat Subramaniam Prof. R.Vaidyanathan...